CRAR of SUCBs
A discussion on CRAR, GNPAS and PCR in scheduled urban cooperative banks in the context of RBI’s latest FSR:
The Reserve Bank of India’s Financial Stability Report (FSR) released on 27 June 2019 discusses the performance of scheduled urban cooperative banks. One of the salient aspects brought out in the report is that at the system level, the Capital to Risk Asset Ratio (CRAR) of these banks has remained unchanged at 13.6% between September 2018 and March 2019. However, at a disaggregated level, CRAR of 4 of these banks was below the minimum required level of 9%. The report has not named these 4 banks. There are 54 SUCBs in the country (42 in Maharashtra, 7 in Gujarat, 2 in Goa and 1 each from Karnataka, Andhra Pradesh and Uttar Pradesh.
It has been found that CRAR of the Ahmedabad Mercantile Cooperative Bank has been falling in the last 3 consecutive financial years. It was 31.52% a year ago and 31.35% in 2016-17. According to Narendra Patel, chairman, of the bank, it has further come down to 28.98% in 2018-19.
In the case of Surat People’s Cooperative Bank, CRAR is 15.47% in 2018-19 and the bank’s director Mukeshchandra Gajjar says this is well above the minimum level.
Rajkot Nagrik Sahakari Bank’s CRAR is 17.54% i n 2018-19. Jyotindrabhai Mehta, director at the bank, says: “We have achieved a comfortable level as regards CRAR. We don’t require any thing to do to increase our position.”
In the case of Rajarambapu Sahakari Bank, Sangli, the CRAR has marginally come down in the last year. It stood at 13.42% a year ago. Rajaram Jakhale, MD, saysit is at 13.18% in 2018-19, a slight decrease due to growth in advances.
RBI data indicates that the comfortable CRAR position of SUCBs continued in first half of 2018-19 as well. However, at endSeptember 2018, there were 4 SUCBs with negative CRAR. During 2017- 18, as much as 93% of SUCBs had achieved the
minimum ratio. The capital position of SUCBs improved in 2017-18. At end-March 2018, among the 54 SUCBs, 50 had a CRAR of more than 9%.
A statement by N.S. Vishwanathan, deputy governor, RBI, in September 2018, in the light of stress tests conducted by the central bank for the banking sector to check the resilience of the system, there has been an increase in GNPAs by 2 Standard Deviations (SDs), while the system level CRAR of SUCBs remained above the
minimum regulatory requirement. It said at the individual level, several SUCBs (26 out of 54) may not be able to maintain the minimum CRAR. Given that these findings are based on Basel I computation, the outcome of stress tests would have been more severe under Basel II and III norms. There is thus a need for the UCBs to strengthen their capital base further. The sector has to identify sources of high quality capital, not just tier 2 capital.
GNPAS DOWN, PCR UP
The FSR states that GNPAs of SUCBs as a percentage of gross advances declined from 8.2% to 6.4% and their provision coverage ratio (PCR) increased from 48.5% to 60.3% during the same period. The RoAs of these banks remained unchanged at 0.7% and their liquidity ratio declined from 34.1% to 33.5% during the same period. The impact of credit risk shocks on the SUCBs’ CRAR was observed under 4 different scenarios. The results show that even under a severe shock of an increase in GNPAs by 2 SDs, the system-level CRARs of SUCBs remained above the minimum regulatory requirement. At the individual level, however, a number of SUCBs (21 out of 54) may not be able to maintain the minimum CRAR.
The net profits of UCBs moderated in 2017-18 on account of slowdown in interest income and decline in non-interest income from a high base, states another RBI report titled ‘Operations and Performance of Commercial Banks’ released in December 2018. Although loans and advances expanded during 2017-18, subdued growth in interest income may be reflective of the easing of interest rates during the period. Total expenditure remained muted due to reduction in interest expenditure, which was pronounced for SUCBs and resulted in an increase in net interest income for both SUCBs and non-SUCBs. RoA of SUCBs, which had moderated in 2017-18, has revived in the first half of 2018-19 to 0.72%.
LIQUIDITY RISKS
RBI had carried out a stress test on liquidity risks using 2 different scenarios - 50% and 100% increase in cash outflows in the 1 to 28 days’ time bucket. It was assumed that there was no change in cash inflows under both the scenarios. The results of the stress tests indicate that 25 banks under the first scenario and 36 banks under the second scenario may face liquidity stress, according to the latest FSR.
The repo rate was 6.25% a year ago and now it is 5.7% to 5.75% after reduction. Gajjar of Surat People’s Cooperative Bank explains: “It is to be noted that ample liquidity in the system has resulted in lower daily overnight variable repo rate in auction by RBI. Even banks are willing to lend at lower rate but the borrowers are not coming forward. The reduction in repo rate by the RBI and downward revision of all overnight interest rate offer opportunity for industry and trade.”
SPECIAL POLICIES
Gajjar also suggests that RBI should formulate special policies for all categories of UCBs and give interest on CRR, or Cash Reserve Ratio, to reduce percentage of CRR for UCBs. This will enable the cooperative banking sector to earn respectable income for improving their financial health.
“The stance of the government for the MSME sector will affect UCBs adversely or positively across the board. It will be immature to project future trend of growth if industrial expansion is restricted due to GST, market demand and risk appetite of business. Growth perception for coming months will depend largely on provisions of 2019 union budget,” says Gajjar.