PSBs’ Existential Crisis

Source: The Hitavada      Date: 28 Sep 2018 12:45:34


Even as it is surmised that BoB’s large balance-sheet and robust capital ratios and Vijaya Bank’s strong capital base would help in addressing the Dena Bank’s balance-sheet blues, policy wonks legitimately pose the query as to the message this amalgamation is sending.


THE Indian banking industry is in the throes of an existential crisis as it is hobbled by the biggest balance-sheet problem that is manifest in the form of a huge non-performing assets (loans) it lent to corporates over the years. Battling hard to get over this major ailment so that it could begin its core dharma of extending credit to the productive and real sectors of the economy so as to ramp up growth of the economy, the public sector banks (PSBs) have even begun one of the few options to prune their numbers by amalgamation route so that the emerging combined entity’s capital base is larger and its lending operations scaled up by way of making adequate investment available to keep the wheels of the economy trundling.

How else could one construe the latest Centre’s decision to ‘amalgamate’ Bank of Baroda (BoB), Dena Bank and Vijaya Bank to form the country’s third largest bank with a combined business of 14.82 lakh crore of rupees with a pan-India network of 9,500 branches? Rating agency Moody’s Investor Service hailed the move as credit-positive presumably because this would improve the efficiency and governance of the newly-created entity than what individually each of the three could have done! On their part, the authorities defended the move arguing that the consolidation meant leveraging of networks, low-cost deposits and mixing of the in-built advantages of individual units to ensure substantial rise in customer base, market reach, operational efficiency, wider bouquet of services and products with vastly improved access to customers.

Even as it is surmised that BoB’s large balance-sheet and robust capital ratios and Vijaya Bank’s strong capital base would help in addressing the Dena Bank’s balance-sheet blues, policy wonks legitimately pose the query as to the message this amalgamation is sending. That is no hidden secret particularly for the smoothly-run successful banks to get ready to absorb weaklings with the Government sitting on their back to execute the misalliance.

It needs to be noted that over the past couple of years, humongous slippages, high spurt in provisioning and massive losses have together tattered many a bank’s balance-sheet, thanks to the former Governor RBI Raghuram Rajan’s Asset Quality Review (AQR) he had set off in 2015 to recognise the burgeoning NPA problem and arrive at a workable resolution. The AQR for clean and fully provisioned bank balance-sheets disclosed doughty NPAs. Stressed loans, not provided for earlier under flexibility given to restructured loans, were reclassified as NPAs and provided for expected losses.

In 2017-18, all such schemes for restructuring stressed loans were withdrawn. Primarily as a result of transparent recognition of stressed assets of NPAs, gross NPAs of PSBs (as per RBI’s offsite returns global operations provisional data as on March 31, 2018) was 8,95,601 crore of rupees, according to Minister of State for Finance Shiv Pratap Shukla in a written reply in the Lok Sabha to a query on August 10. In order to beef up banks, recapitalisation of PSBs of the order of 2,11,000 core of rupees was announced in October 2017, following which 88, 139 crores of rupees was infused in 2017-18 and 65,000 cores of rupees was budgeted for the current fiscal.

While former RBI Governor R. Rajan did his best to bring about qualitative change in tackling the fundamental problem plaguing the banking sector by attacking its complacent “extend and pretend” culture of the bankers, either on their own for pecuniary gains or under duress from the political leaders, it is rather unfortunate that the incumbent vice chairman of Niti Aayog Rajiv Kumar blamed Rajan for his cleansing operations as contributing to slowdown of the economy! If nobody dared to attend to the festering wound by eminently pragmatic plan of action, only surgical remedy or amputation of the affected part of the canker would be the answer, critics wryly say.

Be that as it may, the crisis in the banking sector has not come abruptly as the makings were there for quite a number of years with all the stakeholders merrily ignoring its symptoms and perceptible sprouts. After the nationalisation of banks by Indira Gandhi in the late 1960s, the country’s banking segment offered only limited types of loans (i) working capital loans to productive sectors, firms and farmers that made up well-nigh 76 per cent of banking portfolio and (ii) retail term loans to households for housing and durable goods (less than 24 per cent). But in the early part of this century when the country’s famous term-lending institutions such as IDBI, IFCI and other mega investment banks for corporations wound up their operations, banks began filling up the space left by these biggies by aggressively lending loans on long-term basis to companies for fixed capital investments such as land, building and machinery. This now accounts for 38 per cent of the portfolio, with working capital at 42 per cent and retail at 20 per cent, according to Pronob Sen, former Chief Statistician of India.

This tectonic shift in banking industry’s operation from short-term working capital loans to long-term loans which got accelerated when the Government was encouraging public-private partnerships (PPP) for infrastructure projects in the first decade of this millennium was responsible for the silent pile-up of advances never recovered from the borrowers. There was basically a massive mismatch of asset-liability in the banking industry, whereby the average span of assets (loan portfolio) was going up relative to that of liabilities (deposits).

It was during this period that many a PSB lent to larger borrower caught up in infrastructure projects with long gestation period and the advances were made either because of the proximity of the captains of industry to powers-that- be or because the chiefs of PSBs or their minions managing branch network sought to have a sumptuous feast from the honey pot by hobnobbing with honchos and business tycoons.