Turning around banking sector

Total NPAs of PSU, private banks at around 6 lakh crore

As is generally agreed, the banks form the bedrock of the financial sector of a country. As such, the recent decision to merge smaller banks with the larger ones such as Punjab National Bank, Bank of Baroda and Canara Bank, to gear up efficiency and profitability is believed to be a step in the right direction. The idea behind this merger is a larger regional bank to take on a pan-Indian footprint. This is one of the important steps the Government has thought of in gearing up the banking sector.

Regional consolidations have also been considered so that a North-based bank takes over another in the same region. The NPA problem is not expected to come in the way of such mergers. The only consideration would be not to make the merged entity weaker but a little stronger to take on future challenges.

The merger of five associate banks of the State Bank of India created a larger banking behemoth with some $37 trillion in assets with it earlier this year. This motivated North Bloc to think of stronger and bigger bank entities to stand up competition from global banks, which would eventually have to be allowed to enter India as part of either a WTO deal on services or as part of bilateral or regional free trade pacts.

However, the question of bad loans has emerged a big problem and the Government is aiming to resolve this issue under the new Insolvency and Bankruptcy Code (IBC).

The Code’s objective would be to promote entrepreneurship, availability of credit and to look after the interest of shareholders and amend the law relating to insolvency resolutions not confined to corporate functions but also to partnerships and individuals in a time bound manner.

Moreover, it is significant to mention that the Code offers a market directed, time bound mechanism for resolution of insolvency, wherever possible or required, and thereby ensured freedom to exit.

A section of experts, however, believe that the application of the Code would be limited due to strict time-lines for resolution, which may force some companies into liquidation and increase banks’ capital requirements, according to a report of the global credit rating agency, Moody’s. But this may not be a cause for concern.

High provisioning for banks would negatively affect banks’ profitability over the next year if they need to take large write-down loans relative to their existing loan loss reserves for these assets, the report further pointed out.

This comes in the wake of a recent notification of the Reserve Bank of India (RBI), which stated all accounts -- fund and non-fund based outstanding amount greater than Rs 5000 crores with 60 per cent or more classified as non-performing by banks as of March 2016 – would be referred to the IBC.

Meanwhile, the government wants to push two key legislations in the monsoon session of Parliament. The amendments to the Banking Regulation Act would allow banks to take over companies unable to pay back loans while Financial Resolution and Deposit Insurance Bill 2017 would handle bankruptcies in the banking and financial sectors.

The amended act was earlier notified as an ordinance, empowering RBI to issue directions to banks to initiate proceedings in case of defaulters. Apart from these amendments, the RBI would set up oversight committees to advice on bad loans and give specific solutions.

One may refer here to the Credit Suissa Report which pointed out that during the past three years there has been a steady increase in NPAs. As of June 2016, the total amount of gross non-performing assets for public and private sector banks was around Rs 6 lakh crore. The top 20 NPA accounts then stood at Rs 1.54 lakh crore.

Thus, these bad loans have become a serious lingering problem for the public sector banks. As such, the RBI has taken the matter in right decision and initially taken up stressed accounts, totalling about 25 per cent of the current gross NPAs and referring them to the IBC.

Meanwhile, it remains to be seen how the promoters of the 12 companies selected for resolution by the RBI would participate in the solution process over the next few months. Though lot of reforms have been made, experts are of the opinion that the regulatory changes don’t address the gaps in the institutional framework within which NPAs have to be resolved.

There are expectations that the clean-up drive would lead to restructuring of stressed assets which may necessitate massive provisions that may wipe out a major part of many banks’ capital. The Ordinance was necessary as the Government is willing up fresh capital.

It is expected to infuse Rs 70,000 crore in public sector banks over a period of four years (from 2015-16 to 2018-19) while the banks are to raise another Rs 1.1 trillion from the market to meet their capital requirements as per Basel-III risk norms.

There are experts who feel that RBI’s involvement should be limited while these public sector banks need to embrace higher levels of professionalism and adopt more scientific techniques of decision making and due diligence checks.

To start with the boards of these banks, instead of being filled with representatives of ministry officials, should have professionals with adequate industry experience. The industry perspective is very important in taking a view of the bigger picture while evaluating project proposals and then taking credit decisions.

One may mention here that the P J Nayak Committee had strongly recommended induction of professional bankers in the Banks Board Bureau (BBB) but this has yet to be heeded. In fact, the committee suggested a phased reform process that envisaged the BBA as the first step culminating in the creation of a Bank Investment Company that holds all government stakes and thereby, govern the public sector banks.

Though the present reforms of the banking sector may invigorate it, there are expectations that fresh credit growth may decrease over a period of time. Bond markets should be able to fuel a major portion of fresh credit growth as this has increased significantly over the years.

The concern of the government in tackling stressed assets needs to be appreciated as there was no other way but to bring them down these from the present figure of 8 per cent of GDP.

It is expected that if the whole issue is handled in a professional manner, banking reforms, as envisaged, including merger of weak banks with stronger ones would turn around this sector.

Moreover, insofar as NPAs are concerned, political will and courage would go a long way in arriving at a solution.

By: Dhurjati Mukherjee