Bleeding Banks

Things (Banks) are falling apart, centre cannot hold. The December,15 quarter banks’ results are out and picture has turned gloomy. Public Sector Banks are generally in red, a bold red. Bank of Baroda (3342 cr), Bank of India (1506 cr), UCO Bank (1497 cr),  Indian Overseas bank (1425 cr),  Punjab National Bank (857 cr pre tax loss), Central Bank of India (837 cr), Dena Bank (663 cr), Oriental Bank of Commerce(425 cr), Allahabad Bank (486 cr), , Corporation Bank (383 cr), Syndicate Bank (120 cr)- all December, 15 quarter loses. State Bank of India's profits fell 62% to Rs 1115 cr. Banks which were in profit a quarter before, have started bleeding.

As per Bloomberg data, the market capitalization of  all 20 nationalized banks is less than Kotak Mahendra Bank. Whereas, market cap of 20 nationalized banks  plus SBI is approximately equal to the market cap of HDFC Bank. What can be eked out whether state owned banks do not have the caliber or the zeal or the will to run the banks.

It is not that position has deteriorated suddenly. In the competitive world, the real picture remains hidden from all the stake holders: depositors, investors and the regulator. United Bank of India, in 2014, boldly tried to be transparent and it’s the then CMD had to lose her job. Now when other PSU banks are finding it difficult to show faces, United Bank is giggling with profits of Rs 17 crore in its coffers.

Of course, the slowdown is world over and banking stocks are getting a beat but not up to the level being witnessed recently with PSU Banks in India. The reasons may be varied. Reserve Bank has advised banks to clean up their balance sheets by March, 2017 and to proceed in this direction, RBI has embarked upon Asset Quality Review of the banks. Till now, the units which were not performing well due to slowdown in the economy and/or other factors, their accounts were still being managed, sometimes not with the hope that they will turn around but to save them being declared non-performing. Once declared NPA, bank ceases to earn income over the account but also have to make higher provisions.  The balance sheets of banks, by and large, did not project the true picture. Now Reserve Bank says before we switch over to BASEL III, banks balance sheet is required to be clean and fully provisioned.

RBI Governor Raghuram Rajan,while explaining at the CII Conference as to why the pain in banking sector nowis good, said, “For the loans that are of concern, the banks are attempting to regularizethe loans that can be put back on track, and are classifying those that cannotfor deeper surgery - and taking provisions in according with the degree ofstress in the loans. They will also make provisions for loans that haveweaknesses. Our intent is to have clean and fully provisioned bank balancesheets by March 2017”.

Recovery efforts under the DRT and SARFAESI proving to be ineffective, RBI in recent past released guidelines for  additional steps  to address the issues of NPAs;-

1. Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalising Distress Assets in the Economy.

2. Creation of a Central Repository of Information on Large Credits (CRILC).

3.  Formation of Joint Lenders' Forum (JLF), Corrective Action Plan (CAP), and sale of assets.

4. Flexible Structuring of long Term Project Loans to Infrastructure and Core Industries.

5. Willful Default/ Non-Cooperative Borrowers: to practically close the windows for credit facilities from financial institutions to this class of borrowers.

6. Strategic Debt Restructuring:  to bring change in the management in case of operational / managerial inefficiency of existing promoters.

7. Government is also coming up with the amended Bankruptcy Law.

All said and done, the mute question is why the private banks are comfortable, though feeling heat of the surroundings, but the state owned banks are bleeding. Whether time has come to assimilate the age old adage that "government is to govern and not to do business". P. J. Nayak Committee, to Review Governance of Boards of Banks in India, suggested;-

1. Scrapping and removal of Bank Nationalization Acts, SBI Act and SBI (Subsidiary Banks) - because these acts require government to keep its shareholding above 50%.

2. Government should transfer its shares of PSBs to Bank Investment Company (BIC), with functional autonomy.

3.  Conversion of PSBs into companies as per Companies Act.

4. Appointment of CEOs, Directors and top executives of PSBs would be the responsibility of the Bank Boards Bureau.

The government has accepted almost all major recommendations of the Committee except bringing down government stake below 51%. Seeing the present scenario of the health of public sector banks, government may review its decision and accept the recommendations of P.J.Nayak Committee in toto.

However, we should also understand that present position of banks is due to higher provisioning on account of likely loses. If loses do not materialise, banks will write back provisions to profits. As such,  after the balance sheets of banks are cleaned and fully provisioned, we may expect PSU banks on winning edge once the economy starts turning around. Whatever recovery and sale proceeds of securities of these non performing assets are received, these will straight away go into the profits of these banks. With private universal banks, small banks and payment banks in the fray, PSU banks should be there to keep balance in the mixed Indian economy. Of course, PSU banks will learn from their past mistakes and improve upon. With healthy  competition, a sound financial system will emerge and India will stand on firm footing.

(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