The monsoon forecasts are due soon and in India it is also the time when thunder storms are rather frequent. Some of those storms could descend on the ground, especially in the financial sector, this time around.
At the same time, the build-up of government securities mean a depleted flow of liquidity in the banking system. In other words, the commercial banks will be facing a tight money supply. The implication of this tightness is slower growth of business for the banks and that means less funds to keep a cover on their existing stock of non-performing assets. An early report by Prabhudas Lilladher says that, of the total R3.91 trillion of borrowing by the Centre and states from banks (i.e. excluding insurance companies and small savings), only about R2.04 trillion can be subscribed to. This is assuming an annual growth of 15% in the loan and deposit books of the banks in 2012-13.
But just as this storm is brewing, the banks face a wrong wind from their worsening non-performing assets book as loans turn bad in power, roads and in civil aviation. The worst-hit are the public sector banks, whose capital adequacy was already tight. They face two obstacles to shoring up their capital. The government has no money to raise its shareholding in the banks and the banks were already running a tight ship in terms of their coverage of their non-performing assets. Head-to-head at this point, the top five public sector banks (SBI, PNB, BOB, BOI, and Union Bank) have far lower NPA provisioning than their private sector counterparts and, except for BOB, are all lower than the RBI standard of 70% coverage.
This is the reason why, in the space of a week, the debt papers of two public sector banks?UCO bank and Oriental Bank of Commerce?have been downgraded by credit rating agency Icra.
Since all public sector banks behave similarly in the treatment of their loan books, the question is which one is the next? For UCO bank, Icra has said ?despite the elevated level of credit provisioning, provisioning on gross NPAs has been dropping (from 57% as on December 31, 2010 to 42% as on December 2011) leading to deterioration in solvency profile?. In the space of less than a year, the ratio of net NPAs to net worth has deteriorated from 23% to 36% as on December 31, 2011.
Late last year, three other public sector banks?Syndicate Bank, Bank of India and Union Bank?have been put on credit watch by Moody?s. Essentially, then, this is a storm brewing around the public sector banks. It will be unfair to say the majority shareholder in these banks, the Government of India, is unaware of the clouds. So what are the storm shelters it has built up? The first is the R15,600 crore it has provided for in the Budget this year to recapitalise the banks. Since most of the PSU banks are just a shade below the Basel II mandate of 8% Tier I capital, the sum could go a long way to finance these banks.
The more debatable proposal is the plan to set up a financial holding company. If the plan is to transfer government share-holding in all the banks to this company, where the government holds a majority, it can go a long way to avert the storm. But as finance ministry mandarins indicate, it will act only as a resource raising company to finance the shortfall in the capital of the public sector banks. In that case, what it will essentially degenerate into is to act as one more drag on the banks by borrowing or selling equity to them to refinance them later on. Essentially, a domestic system of round tripping.
Even if the holding company adopts the virtuous path of warehousing the government shareholding in these banks, it has to be first steered through Parliament. The Standing Committee on finance and other such devices will ensure it can be born only next year. The storm for the public sector banks, which command more than 70% of the total banking turnover in the country, is, however, likely to gather steam this year. In which case, we will just have to hope that while the drag from the government borrowing will stay, hopefully a good percentage of the non-performing assets of the public sector banks will become standard. This, of course, assumes that the Indian economy will show a better score-card than it has shown so far.
For instance, it should mean that banks will get higher than the 12.5% growth in deposits (fourth quarter, January & February) to ensure they can provide positive incremental credit to the industrial sector in the new financial year. In the same period, it has dipped by 114% from the aggregate banking sector.
It won?t hurt right now to send up a quick prayer that a storm does not break as a political storm like a mid-term election season kicks in. It could then become a perfect storm.
subhomoy.bhattacharjee@expressindia.com
