Dilemma of Public Sector Banks' CEOs

During a recent meeting with bank’s Chief Executive Officers, RBI Governor Raghuram Rajan impressed upon strengthening the balance sheet of  banks by March 2017. The big task before the present day CEOs of banks (particularly public sector banks) is to reduce the level of stressed assets (non performing assets + restructured assets),  by way of recovery in stressed assets and/or by increasing the good credit portfolio. Let’s understand how much feasible it is:-

1.      CAPITAL:- Banks have to maintain Capital Adequacy Ratio which is a certain percentage of risk based assets of the banks. Under BASEL III, presently a scheduled commercial bank has to keep 9% capital of its total risk weighted assets. Different types of loans have been assigned different risk weights, e.g.,  loan against security of fixed deposit is assigned 0% risk weight whereas Commercial Real Estate is assigned 100% and the Consumer credit carries 125% risk weight. The higher the risk weight attached to a loan, the higher will be the interest income to the bank and at the same time higher will be chances of delinquencies. In public sector banks, government is the major share holder and it is neither divesting its equity to enable banks raise funds from market, nor infusing adequate capital. Banks are constrained to play within limited boundaries.

2.      LOW COST DEPOSITS:- To increase the credit portfolio, banks require deposits. The more low cost deposits banks mobilise, the better margin of profit they can enjoy by giving loans. In banking parlance, CASA (current accounts savings accounts) is the low cost deposits. Over the years, banks have been vying for CASA, but with the granting of licences to Payment Banks by RBI and the advent of numerous digital wallets, banks may be denied the privilege of keeping CASA with them. It is time for banks to devise innovative ways in tune with New Banking Paradigm to increase profitability. SBI has launched a mobile wallet and also tied up with Rel Jio for the payment bank. (Profits are also a source of increasing Capital base, since banks retain major portion of their profits after distributing dividends)

3.      STATUTORY REQUIREMENTS:-   Banks have to keep certain percentage of their deposits in Cash Reserve Ratio (4%) and Statutory Liquidity Ratio (21.5%). CRR is to be kept with RBI and Banks do not earn any interest income over this amount; under SLR banks keep these funds in liquid form either in cash or investing in government securities, but here the returns are very low. These statutory obligations also put strain on profitability of  banks.

4.      IDENTIFICATION OF BORROWERS:-  Even if banks get capital and mobilise deposits, the problem is whom to give loans. Presently, infrastructure , steel & aluminium and commercial  real estate sectors are under stress. Manufacturing is not picking up. Past experience of delinquencies and recoveries  shows that NBFCs, Micro Finance Institutions and Private banks are more equipped to give retail and small loans than the public sector banks. 

The dilemma before  CEOs of  public sector banks is how to save banks and come out of present day imbroglio. RBI Governor  has impressed upon strengthening the balance sheet of  banks. This is possible by making provision for the stressed accounts and also by putting some of these assets back on track. Certain suggestions are as below:-

a.     Banks to make recoveries in stressed accounts. In this way,  banks will be required to make less provisions and also earn interest on non-performing assets – a double bonanza for enhancing capital base.  As of September, 2015 quarter, the average stressed assets in the banking sector remain at 10.7% with most of the public sector banks going above 15% and a few  above 20%. RBI has given many tools to rein in the delinquent borrowers and to make effective recoveries, viz, SARFAESI Act, DRT and State Recovery Tribunals.

b.     The existing credit portfolio should be consolidated by way of effective credit monitoring. The strength and the cash flow of the borrowing units to be constantly reassessed to detect  early warning signals in order to  pre-empt any incipient sickness percolating in the accounts. RBI’s “Central Repository of Information on Large Credits (CRILC)” is the framework for early identification of problem accounts, timely restructuring of accounts which are considered to be viable, and taking prompt steps by lenders for recovery or sale of unviable units. The “5/25 scheme” is aimed at companies in the infrastructure and core sectors to tide over bad times, with repayment period spread over a longer period. To deal strictly with the delinquent borrowers, RBI has empowered the banks to identify them as “Non Co-operative Borrowers”; to mark them as Red Flagged Accounts under “Framework for Dealing with Loan Frauds”; and to change the management under “Strategic Debt Restructuring Scheme”. The effective use of all the armours provided by RBI will inculcate financial discipline among  borrowers. 

c.     Banks should continue to make quality advance. Under any circumstances and with any excuses, credit growth should not be stopped lest banks start digging their own grave. Growth is a way of life for an individual, an  institution and a nation. The phobia of accountability for a true banker is unwanted and unwarranted. An MD & CEO of a bank has rightly said, “The duty of a soldier is to fight with the enemies and that of a policeman is to deal with criminals. In discharge of his duties, he may lose his life but he cannot run away from his duties. Similarly, the duty of a banker is to give loans. He cannot stop giving quality loans for fear of being accountable”. 

(The views expressed in the article are merely for academic purpose and are not subscribed by the organisation where the author is working)

Tilak Gulati,  Assistant General Manager, UCO Bank. 

Author: www.itstrgulati.blogspot.in