Recapitalising PSU banks without restructuring will serve no purpose

A sharp rise in Bank of Baroda share price on Monday despite higher losses indicates that the market is willing to reward banks that are willing to clean up their slate. A series of negative surprises in the public sector banking space prevented investors from taking a call on these banks. No one knows how deep the problem is in this sector.

But Bank of Baroda’s management preferred to recognise all bad assets arising out of the RBI asset quality review (AQR) in the December 2015 quarter. Most of the other banks preferred to spread it between December 2015 and March 2016 quarters.

 

It’s the initiative taken by Bank of Baroda that gave the market some confidence in these stocks. Other PSU banks have joined the rally which is led by Bank of Baroda – rising by nearly 24 per cent.

Even those banks that had been conservative will be making complete provisions by next quarter. The market will discount the news well in advance and everything may be forgotten as these banks start rallying again.

But what about the losses that has been incurred by the banks. Non-performing assets (NPA) in the listed banking space have surged by Rs 1 lakh crore. Over the past three years, 27 public sector banks have written off nearly Rs 1,14,000 crore of loans.

Despite such high levels of losses, government has talked of giving them another Rs 2.40 lakh crore. While one might say that this is necessary for the financial viability of the banks and revival of the economy, there is no assurance from the banks that this money will not go down the drain.

Banks have periodically written off loans either for political reasons, misjudgement or partisan reasons. No doubt there are genuine cases where the company is impacted and unable to pay on account of sudden changes in business cycle. 

Bank of Baroda has seen a change in management with PS Jayakumar, a private sector executive taking charge of the bank. It has been observed in the past that when a new head is given responsibility of a bank, he cleans up the mess of the earlier management in the first few quarters.

But cleaning up the balance sheet after the earlier head has retired serves little purpose. No one is held accountable.

There will always be some sort of defaults in the lending business, but when more than 10 per cent of all loans disbursed have turned toxic and that too across public sector banks, it indicates a systemic problem.

Curiously, most of the toxic assets have always been in public sector banks. Public sector banks have little choice in lending to infrastructure and power sector companies as majority of the private sector players generally stay away from them.

But the share of bad loans in other sectors by public sector players is also high. Be it textile, steel, real estate or jewellery; public sector banks are always left holding the baby. This raises questions of skill sets in appraising loans, not only by the banks but also by the rating agencies who give these companies an investment grade rating.

The other reason public sector banks are always caught on the wrong foot is because their performance on the retail front is bad. Banks like HDFC Bank and Kotak Mahindra Bank have grown based on their strength in disbursing loans to the retail sector. With a sizeable amount of loans disbursed to thousands of small ticket borrowers, the risk is spread out. But more importantly there is little pressure on the bank to disburse the money in order to earn returns.

Unless public sector banks and all those who ‘helped’ sanction doubtful loans are held accountable, we will continue to face similar problems going forward. A structural change with a ‘carrot-and-stick’ policy is needed to bring credibility to the public sector banking space.

Unless this is done the next crisis would be bigger than the Rs 2.4 lakh crore the government intends to pump in. The finance minister has talked of bringing in banking sector reforms. One hopes that accountability is at the top of the list.