Re­mon­eti­sa­tion and Banks: The Pain Pangs Stay

The Economic Times - - Money & Banking -

The re­mon­eti­sa­tion ex­er­cise had as its ful­crum the com­mer­cial bank­ing sys­tem which was the en­abler of the grand de­sign. 50 days of hard work has gone into the process of ac­cept­ing old notes from the sys­tem and dis­burs­ing cur­rency through branches and ATMs. Fur­ther, the banks had to be com­pli­ant with over 60 reg­u­la­tory changes and en­sure that all the 130,000 odd branches were made cog­nizant of the same. The econ­omy too has been shaken if not stirred, and the im­pli­ca­tions are still a mat­ter of con­jec­ture. How have banks been af­fected by all these de­vel­op­ments if we tran­scend the op­er­a­tional is­sues?

First, banks have been flooded with de­posits which could go up to around ₹ 12-14 lakh crore. The cost of these de­posits gets an­chored to at least 4%, if not more, de­pend­ing on what pro­port ion of these de­posits are con­verted into time de­posits. Av­enues for de­ploy­ment of these funds have been lim­ited, with credit growth wit­ness­ing a mi­nor set­back due to the non-fruc­ti­fi­ca­tion of the busy sea­son im­pe­tus. This has meant that these de­posits have moved over as in­vest­ment in gov­ern­ment se­cu­ri­ties (G-Sec)and af­ter a tur­bu­lent phase of reg­u­la­tory fine tun­ing, which also in­volved im­po­si­tion of 100% in­cre­men­tal CRR at one point of time that was re­versed, have moved to­wards a re­turn of around 6% on the MSS bonds. Hence, the spread is quite low on these ex­oge­nous de­posits which have come in – some have also been con­verted to fixed de­posits at higher rates which would lower the same. The re­cent move to lower lend­ing rates, which af­fects the en­tire loan port­fo­lio, would pres­surise their net in­ter­est mar­gin fur­ther.

Sec­ond, G-Sec yields had started mov­ing south­wards be­fore Novem­ber 8, thus in­di­cat­ing good trea­sury gains. This would tend to get di­luted as an in­crease in sup­ply of gov­ern­ment bonds due to the is­suance of MSS bonds through the CMBs has low­ered their prices with yields mov­ing up. This would be a dou­ble whammy for banks for Q3 and Q4.

Third, op­er­at­ing costs which are around 2% of to­tal as­sets would also tend to in­crease as the non-in­ter­est ex­penses have in­creased sharply in the process of re­mon­eti­sa­tion which in­volves tak­ing on the ATM re­cal­i­bra­tion costs, over­time for PSB staff, trans­porta­tion of notes, daily over­heads in branches, se­cu­rity ex­penses, etc. While the ra­tio would get ab­sorbed in the higher size of as­sets, in terms of ab­so­lute ef­fect on prof­its, it would be sig­nif­i­cant.

Fourth, the present sit­u­a­tion does not au­gur well for NPAs. There has al­ready been an in­crease in the level of NPAs for per­sonal loans, es­pe­cially for ed­u­ca­tion, auto and con­sumer durables. This would tend to in­crease in the rest of the year as the cash crunch has hurt em­ploy­ment at the lower in­come lev­els, thus im­pact­ing their re­pay­ment ca­pac­ity. The same holds for SMEs which will be af­fected neg­a­tively due to the slow­down in the econ­omy. There­fore, higher NPAs are bound to be the re­sult of the eco­nomic im­pact these 50 days. The is­sue was to have got­ten sorted out by March 2017, but it looks likely that it would last for a longer pe­riod of time.

Fifth, the squeeze in net in­ter­est mar­gin com­bined with lower trea­sury gains and higher op­er­at­ing cost would be fur­ther pres­surised by higher pro­vi­sions lead­ing to lower growth in prof­its. This will hold more for PSBs than pri­vate banks as they are the ones af­flicted more on the NPAs. Other fac­tors would be com­mon for all.

Sixth, lower prof­its make bank stocks that much less at­trac­tive and, in turn, would force the gov­ern­ment to pro­long the pe­riod of bank cap­i­tal­i­sa­tion from the Bud­get as it will take a longer time for them to be dis­in­vest­ment wor­thy. Hence, the gov­ern­ment will have to con­sider us­ing some of the pro­ceeds of tax or penalty col­lec­tion from In­come Dis­clo­sure Schemes II and III which will be known by March.

The crux is re­ally that the turn­around in the state of pub­lic sec­tor banks will take a longer time to work out with most of the in­di­ca­tors mov­ing be­low ac­cept­able lev­els on ac­count of this unique col­li­ga­tion of events in the last 50 days. Pri­vate banks will also not be com­pletely iso­lated and though the im­pact would be di­luted given their rel­a­tively stronger ini­tial con­di­tions, they will be vul­ner­a­ble to mar­ket move­ments. On the whole, the pic­ture may not be too bright till March 2017.

Newspapers in English

Newspapers from India

© PressReader. All rights reserved.