State-run banks spurn risky lend­ing to con­serve cap­i­tal

Bad-loan pro­vi­sions, steep losses eat into lenders’ cap­i­tal

The Hindu Business Line - - FRONT PAGE - RAD­HIKA MERWIN

The RBI, in its Mone­tary Pol­icy last week, tweaked norms for riskweights on bank loans to NBFCs in a bid to free up cap­i­tal for lend­ing. But many pub­lic sec­tor banks (PSBs) may well choose to shore up their cap­i­tal ra­tios rather than grow their loan books.

In the past one-and-a-half years, PSBs have done just that — con­sol­i­date their loan books and re­duce their ex­po­sure to risky as­sets. De­spite the Cen­tre’s mas­sive cap­i­tal in­fu­sion of ₹88,000 crore into PSBs in FY18, these banks have since ei­ther shrunk their loan books or grown them only mod­estly.

Im­por­tantly, they have re­duced their risk-weighted as­sets (RWAs) by a faster pace (than de­cline in loans), im­ply­ing they have been mov­ing to safer and less risky loans as­sets.

Be­tween the Septem­ber 2017 (be­fore the mega bank re­cap) and De­cem­ber 2018 quar­ters, the RWAs for most PSBs fell 15-20 per cent.

In the nine months ended De­cem­ber 2018 alone, RWAs fell 613 per cent for many PSBs. The RBI’s Fe­bru­ary 2018 cir­cu­lar on stressed as­sets had led to a steep rise in bad loans pro­vi­sion­ing in the March 2018 quar­ter, eat­ing into banks’ cap­i­tal. Par­ing ex­po­sure to risky as­sets has eased up their cap­i­tal.

The RBI plac­ing re­stric­tions on credit to un­rated bor­row­ers, or on ex­pan­sion of high RWAs for banks un­der prompt cor­rec­tive ac­tion (PCA), has also led to a fall in RWAs.

But non-PCA banks, such as Bank of Bar­oda and Pun­jab Na­tional Bank, have also re­duced their ex­po­sure to risky as­sets since Septem­ber 2017. For SBI, (as a group) too, RWAs mod­er­ated be­tween March and Septem­ber 2018.

Bor­rower pro­file

RBI reg­u­la­tions re­quire that the amount of cap­i­tal a bank holds is pegged to the pro­file of its bor­row­ers; riskier the bor­row­ers, higher the cap­i­tal needed.

The cen­tral bank as­signs dif­fer­ent ‘risk weights’ to dif­fer­ent types of loans based on the pos­si­ble de­faults for each cat­e­gory. Loans to the Cen­tral govern­ment have a 0 per cent risk weight while those to com­mer­cial real es­tate have a 100 per cent weight. Cap­i­tal ra­tios are de­ter­mined with RWA as de­nom­i­na­tor and hence a decrease in RWAs eases up cap­i­tal.

Num­bers re­veal that be­tween the Septem­ber 2017 and March 2018 quar­ters, the tier I cap­i­tal ra­tio for weaker PSBs (placed un­der PCA) fell notably de­spite the mas­sive cap­i­tal in­fu­sion by the Cen­tre and re­duc­tion in the banks’ RWAs. Banks such as IOB, Corporation Bank, Allahabad Bank, PNB and Andhra Bank were just about meet­ing their tier 1 cap­i­tal ra­tio re­quire­ment of 7 per cent as of March 2018.

The RBI’s Fe­bru­ary 2018 cir­cu­lar — that did away with all old re­struc­tur­ing schemes — forced the banks to ac­cel­er­ate the NPA recog­ni­tion ex­er­cise. This led to around ₹1.2lakh crore of NPAs be­ing added to the sys­tem and PSBs to­gether re­port­ing an eye-wa­ter­ing loss of ₹62,000 crore in the March 2018 quar­ter alone.

Fur­ther shrink­ing

In a bid to ease up pres­sure on cap­i­tal, PSBs con­tin­ued to shrink their RWAs in the nine months up to De­cem­ber 2018, and their RWAs fell 6-13 per cent.

This, along with the Cen­tre’s cap­i­tal in­fu­sion and mod­er­a­tion in bad loan ac­cre­tion, has helped im­prove the tier I cap­i­tal ra­tio for some banks. Even so, some, such as UCO Bank and IOB, are just about meet­ing the re­quire­ment.

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