The government demands dilution of restrictions on lending to below ‘Double A’ rated borrowers, which it thinks tapered credit flow and growth. With non-bank lenders struggling and slowing down business to preserve liquidity amid acute shortage of it, little wonder the government is pushing for dilution ahead of elections next year. But RBI’s central board put its foot down on the government’s proposal.
PERFORMANCE OF BANKS UNDER PCA
As many as 12 banks, including one privately-owned, are under PCA with a cumulative 18.5% share in advances and 20.8% share in deposits. Despite weak capitalisation, these banks were growing credit over 10%, as strong as any other bank till 2014. Their credit growth has fallen to zero by 2016 and remained in the negative zone ever since. Post RBI’s asset quality review starting from 2014, NPA recognition at PCA banks has led to a sharper rise in both gross and net NPAs, relative to non-PCA banks, showing their longoverdue recognition of NPA.
“This reveals that the underlying asset quality at PCA banks was deteriorating at a sharper pace compared to non-PCA banks since 2011, which is now accepted as the time by which the lending boon of 2009-10 began to unravel,” deputy governor Viral Acharya said recently.
The government infused more than Rs 2,30,000 crore in banks owned by it since 2005, while more than half of it has gone into banks currently under PCA. But their capital eroded in the last two years as they suffered net losses quarter after quarter.
THE CAPITAL DEBATE
India Ratings & Research retained its negative outlook on public sector banks except State Bank of India and Bank of Baroda, for their weak capitalisation and expected rising provisions on the large stock of non-performing loans.
“This would continue to be a drag on their performance and impair their ability to maintain the market share and systemic importance. The balance sheet of these banks may remain stagnant, given increasing capital requirements under Basel III transition, despite government infusions over FY18-19,” the rating firm said.
The government in October 24 last year announced a Rs 2.11-lakh crore package for bank recapitalisation that include budgetary provisions of Rs 18,139 crore and recapitalisation bonds of Rs 1.53 lakh crore. The banks would have to raise the balance amount from market by diluting government equity. So far, recapitalisation bonds of Rs 80,000 crore have been issued. Moody’s Investors Service said capitalisation is the weakest for Indian banks among BRICS countries with a tangible common equity ratio of 8.7% at the end of 2017. Capital profile has gone down for loss-making lenders without internal accruals.
The government may become reluctant in infusing more capital in future given its fiscal deficit challenges as we have seen during Europe’s soverign debt crisis when governments with weaker public finances were not in favour of recapitalising distressed banks. The Indian government has announced the mega bank merger to hide Dena Bank’s 22% assets under NPA and eroded capital by the relative capital strengths of Bank of Baroda and and Vijaya Bank.
“If PCA is diluted, there would be no urgency for the government to infuse capital in weak public sector banks. They have other priorities,” said Pratip Chaudhuri, former State Bank of India chairman. “RBI should cut cash reserve ratio instead, so that banks get additional fund to lend.”
IS PCA FOOLPROOF?
Acharya, who was teaching economics at New York University before joining RBI in January 2017, advocated PCA for preserving capital, an essential raw material for the struggling banks. But that may not suffice to get back to business until they address legacy issues such as governance, inability to come up with differentiated products for customers and customer dissatisfaction. But risk lies there as well.
“NPAs in agriculture, SME and personal or retail loan segments have increased significantly (in terms of percentage). Given that RBI forbearance is available in some of these segments in terms of recognition, part of incremental credit costs on such accounts may be recognised in Q4FY19-FY20,” India Ratings cautioned
Banks facing lending restrictions also lose good clients which makes their recovery slower in a tightly competitive market.
RBI also bars banks under stress from distributing profit to preserve capital, restricts their branch expansion and freezes hiring to rein in cost and puts limits on management remuneration and directors’ fee in extreme cases.
“These are the common business practices… if not followed then the regulator steps in,” said Kuntal Sur, PwC’s financial services partner. “Public sector banks may not be using common risk evaluation methodology. They may not always use their own risk appetite and instead follow the lead bank blindly, putting their portfolio at risk.”
If placing banks under PCA was the first step to stabilise these feeble banks, deeper reforms in governance, human resource capabilities and risk evaluation system modernisation are needed to make these banks capable again to compete.