The RBI’s move to clean up bank bal­ance sheets has made close to half a dozen banks nearly dys­func­tional. There is lit­tle hope of their re­cov­ery in the near term.

Business Today - - CONTENTS - By Anand Ad­hikari Il­lus­tra­tion by Raj Verma

The RBI’s move to clean up bank bal­ance sheets has made close to half a dozen banks nearly dys­func­tional. There is lit­tle hope of their re­cov­ery in the near term

THE RE­SERVE BANK OF IN­DIA'S cor­rec­tive ac­tion frame­work for weak banks is akin to tak­ing an in­jured ath­lete to bed rest,” ex­plained a Re­serve Bank of In­dia (RBI) deputy gover­nor last year when bank cus­tomers started wor­ry­ing about close to a dozen pub­lic sec­tor banks (PSBs) fac­ing reg­u­la­tory in­ter­ven­tions, the most prom­i­nent be­ing the prompt cor­rec­tive ac­tion (PCA) scheme. The PCA frame­work is trig­gered when a bank’s three crit­i­cal pa­ram­e­ters – as­set qual­ity, re­turn on as­sets (RoA) and cap­i­tal ad­e­quacy – fall be­low a thresh­old. It leads to re­stric­tions on pay­ment of div­i­dend, set­ting up new branches, fresh hir­ing, etc., to re­store the bank’s health. The RBI has put 11 out of 27 PSBs – which to­gether ac­count for three-fourth of the bank­ing as­sets – un­der the PCA frame­work.

But can the RBI’s care help these banks get back into health? Con­sid­er­ing that the first bank to go un­der the PCA, United Bank of In­dia (UBI), in 2014, is still not fit enough to be dis­charged from the RBI’s crit­i­cal care, the an­swer can­not be a clear yes. Sim­i­larly, three years ago, the RBI had trig­gered cor­rec­tive ac­tion on Chen­nai-based In­dian Overseas Bank. The bank is still un­sure when it will get to exit as its per­for­mance pa­ram­e­ters are still in the red (See The PSB XI).

Alarm­ing Sit­u­a­tion

The sit­u­a­tion is grad­u­ally slip­ping out of the RBI’s hands. Last week, it put harsh re­stric­tions on two PCA-re­ferred banks, Dena Bank and Al­la­habad Bank, af­ter their fi­nances fur­ther de­te­ri­o­rated. Un­der the PCA frame­work, the RBI has dis­cre­tionary pow­ers, which start with milder sanc­tions and can even lead to pun­ish­ing re­stric­tions such as di­rect­ing the bank to halt lend­ing. Dena Bank, for in­stance, has been told not to do fresh lend­ing. There are also re­stric­tions on fresh hir­ing. Al­la­habad Bank, too, has been asked not to raise costly de­posits, in­vest in non-bank­ing as­sets or lend to bor­row­ers with high risk.

This is just the tip of the ice­berg. Three more large PSBs, with to­tal bal­ance sheet size of close to ` 20 lakh crore, are ex­pected to come un­der the PCA. The crit­i­cal pa­ram­e­ters of New Delhi-based Pun­jab Na­tional Bank have reached PCA thresh­old lev­els af­ter the al­leged ` 11,000 crore Ni­rav Modi fraud. It re­ported a net loss of ` 12,282 crore in 2017/18 with gross non­per­form­ing as­sets (NPAs) at 18.38 per cent of ad­vances at ` 86,620 crore and cap­i­tal ad­e­quacy ra­tio of 9.20 per cent as against the RBI thresh­old of 9 per cent. The RoA is mi­nus 1.60 per cent. Mum­bai-based Union Bank of In­dia is an­other likely PCA can­di­date. For

2017/18, it re­ported a net loss of ` 5,247 crore, gross NPAs of ` 49,369 crore, al­most 15.73 per cent of ad­vances, cap­i­tal ad­e­quacy ra­tio of 11.50 per cent and RoA of mi­nus 1.07 per cent.

A Bit Over­ag­gres­sive

Over the last few years, banks, in­clud­ing the pri­vate sec­tor ones, have been un­der huge pres­sure due to de­te­ri­o­rat­ing as­set qual­ity, poor credit off-take and over­lever­aged com­pa­nies. This hit PSBs more be­cause of their high reliance on cor­po­rate lend­ing and higher ex­po­sure to trou­bled sec­tors such as in­fra­struc­ture, power, steel and tex­tiles. PSB bankers say the RBI did not help and in­stead sought higher provisioning for NPAs. The mea­sures in­cluded as­set qual­ity re­view un­der which the RBI asked banks to make provisioning for stressed ac­counts

(not nec­es­sar­ily NPAs in their books) as if they were NPAs. The up to 50 per cent provisioning for com­pa­nies re­ferred to the Na­tional Com­pany Law Tri­bunal un­der the new In­sol­vency and Bank­ruptcy Code (IBC) also wors­ened the fi­nan­cial po­si­tion of banks. The re­cent move to scrap all restruc­tur­ing schemes such as cor­po­rate debt restruc­tur­ing, strate­gic debt restruc­tur­ing, S4A and 5/25 – and mak­ing IBC the over­ar­ch­ing frame­work for debt res­o­lu­tion and bank­ruptcy – is pushing more as­sets into bank­ruptcy. Apart from this, there are quite a few power pro­jects that are a fit case for liq­ui­da­tion. In liq­ui­da­tion cases, banks have to make 100 per cent provisioning. Given the RBI’s plan to re­solve ev­ery NPA case un­der the IBC, there is a like­li­hood of banks hav­ing to make a to­tal provisioning of over ` 4 lakh crore in the com­ing years. Banks are ex­pected to con­tinue re­port­ing mas­sive losses in 2018/19, too.

“In­crease in provisioning will hurt prof­itabil­ity. Weak PSBs, in par­tic­u­lar, will con­tinue to re­port losses,” said a re­cent Moody’s In­vestor Ser­vice re­port. The re­port pointed at a sil­ver lin­ing, too. “The near-term im­pact of this will be largely off­set by planned cap­i­tal in­fu­sion from the gov­ern­ment,” Alka An­barasu, Vice Pres­i­dent and Se­nior An­a­lyst at Moody’s, said in the re­port. The gov­ern­ment has al­lo­cated ` 2.11 lakh crore through bud­getary sup­port, re­cap­i­tal­i­sa­tion bonds and eq­uity rais­ing for PSBs for the next two years.

The gov­ern­ment is be­ing mag­nan­i­mous as this is an elec­tion year and PSBs play a big role in the so­cial sec­tor. It is also talk­ing about ask­ing the RBI to ease the PCA frame­work a bit. The gov­ern­ment is also con­cerned about credit flow to SMEs and MSMEs where few play­ers apart from PSBs lend. But ex­perts say the gov­ern­ment and the RBI need to do more. “The is-


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