Can someone listen to the doctor in the house?
It’s entirely up to North Block as the owner to find a way to get state-run banks out of the prompt corrective action framework, report Raghu Mohan & Abhijit Lele
It’s up to North Block to find a way to get state-run banks out of prompt corrective action, write RAGHU MOHAN & ABHIJIT LELE
“Ahospital bed is a parked taxi with the meter running,” said Groucho Marx. North Block, and the Reserve Bank of India (RBI) at its upcoming board meeting on November 19, will have to figure out a way to get 11 state-run banks, laid up in the prompt corrective action (PCA) sick bay, off the ventilator and talking. Given that these banks account for 19 per cent of systemic credit, at stake is the flow of credit to India Inc and their very future if they continue being on the ventilator.
Amid chatter about North Block and Mint Road smoking the peace pipe, it’s being speculated that a case may be made that PCA banks should shed assets which guzzle a lot of capital on their books (and also some of their real estate) to the stronger capitalised state-run banks. It’s much like the fire-sale at Infrastructure Leasing & Financial Services, or the securitisation of portfolios by non-banking finance companies to generate capital.
Even as a case is being made, and weighed up, for the stage-wise provisioning for sub-standard assets without any distinction being drawn between secured and unsecured loans.
PCA or “narrow banking”, is a globally accepted practice to quarantine weak banks so that they eschew risks and conserve capital to prevent them from sinking deeper. Since 1960, Mint Road has rung in over 60 mergers or transfer of assets to weed out weak banks, though a formal PCA framework kicked in only in 2002.
It’s understandable when Kishori Udeshi, former RBI deputy governor, says she can’t simply understand the fuss that’s broken out right now: “Scores of urban cooperative banks were under the PCA in the 1990s. You didn’t hear a squeak then. Once you recover – under the PCA – you can get back to normal business”.
It was under her charge, for example, that the board of Global Trust Bank (GTB) was ousted and the bank ‘force-merged’ with the Oriental Bank of Commerce in 2003 – the only such case since Independence. Of course, the forced merger raised the issue of why taxpayers should foot the bill for private excesses, but it did at least stop the contagion from spreading.
No free rides
We are back on familiar territory. The punch bowl where the 11 staterun banks were happily supping away has been taken away and they have been put into therapy; you have more than shades of GTB in all this — of the taxpayer paying the price of a credit binge.
The issue is that the call for loosening the purse strings is not going to be easy.
Given the state of the fiscal deficit, the Centre is no position to continue to recapitalise them which, in any case, it can’t continue forever. While the problem is not of recent vintage, the surprising part about it all is that, for all the public display of fury, what’s been lost in the din is that Mint Road had red-flagged the mess in the very first year of the current dispensation at the Centre.
S S Mundra, former RBI deputy governor, observed on May 5, 2015 that capital adequacy for the banking system had slipped to 12.7 per cent by the end of FY15 from 13.01 per cent a year earlier. “Our concerns are larger in respect of staterun banks where it has declined further to 11.24 per cent from 11.4 per cent (during this period),” he said.
Mundra did take note of the constraints on the Centre when it came to meeting the capital needs of these banks, but he was nonetheless categorical: “From a regulatory standpoint, we feel that some of these poorly managed banks could slide below the minimum regulatory threshold of capital if they don’t get their acts together soon enough. The need of the hour for all banks, and more specifically, in respect of state-run banks, is that capital must be conserved and utilised as efficiently as possible.”
The CEO of a state-run bank under PCA on condition of anonymity puts the blame squarely on the Centre: “They should have found a solution given the ownership character and the root of the problems banks face.” He went on to rub it in: “PCA is a step against the owner and not against the management (of the bank).” Given the government’s dominant role in critical sectors such as infrastructure, steel and manufacturing and the role it plays in ensuring fuel-linkages to power companies, the onus, said the CEO, “is to correct the prevailing situation in these areas, and also give adequate capital to ailing banks”.
Treatment worse than the cure?
Soumya Kanti Ghosh, group chief economic adviser, State Bank of India in his note on the PCA said that a comparison of the Indian and US framework should remind us of former Federal Reserve chair Ben Bernanke, who believed that constrained discretionary rules might achieve the desired objective of monetary policy making rather than a strict, rule-based approach.
Indian banks are subjected to gradual age-wise provision for substandard assets starting from 15 per cent in the first year to 25 per cent, 40 per cent and 100 per cent in subsequent years, irrespective of whether collateral is available or not.
Higher provisions are a must for unsecured substandard assets. North Block may expect the RBI to go easy, but the worry here is the delays in dud-loan settlement, despite the Insolvency and Bankruptcy Code, 2016 which erodes the value of the collateral so quickly that it comes as unsecured exposure for all practical purposes. “Additionally, to borrow from behavioural economics, regulators can be expected to employ their discretion advantageously when there is an opportunity for learning via repeated practice and discussions. Perhaps the US framework encompasses more learning by doing and hence is more effective and less stringent,” said Ghosh.
Ajit Subedar, general secretary of the RBI Employees’ Association, was blunt: “We stand with the RBI’s management. Capitalisation for banks is like petrol for cars. If there is no fuel, how do we expect to move forward? It’s also unfair to place banks under PCA for such a long time. It’s not to suggest that they should be brought out of it right away, but a business plan should have been thought of,” he said.
A senior RBI official who did not wish to be named countered: “Once a PCA case is put forward to the Board of Financial Supervision, what needs to be done is clearly spelt out. It includes capital concerns. If these had been private banks, you would have had a decision by now.” As to whether there is scope to relax capital adequacy, non-performing assets and return on assets thresholds under PCA, he retorted: “If we are strict, we are blamed…” before trailing off.
The earlier mentioned chief of a PCA bank added another layer of complexity to the subject when he referred to the Centre being the “guarantor of the money kept by people with these banks”. This is a reference to the deposits of all banks being uniformly insured for a sum of ~100,000 without making any allowance for the huge variance in their financials.
Is there a case to review Basel norms and their applicability given the situation? “It has nothing do with Basel norms,” said Udeshi firmly. “Don’t even go near it. It can all be sorted out if the ministry, RBI and senior bankers sit at the table.”
It’s back to the operation theatre.