While public sector bank chiefs welcomed the government’s capital allocation and the proposed measures suggested by the finance ministry, analysts pointed out that the steps outlined in Wednesday's announcement may fall short of addressing some of the structural issues in the banking sector.
While public sector bank chiefs welcomed the government’s capital allocation and the proposed measures suggested by the finance ministry, analysts pointed out that the steps outlined in Wednesday’s announcement may fall short of addressing some of the structural issues in the banking sector. “As far as the reforms are concerned, they are overall positive, but we don’t think that they are meaningful enough to address the structural weakness in the banks’ corporate governance,” said Srikanth Vadlamani, vice president, financial institutions group, Moody’s Investors Service. Analysts said reforms around bank board supervision and improving the performance management system in the Indian banking sector will help to iron-out the more structural challenges. Some of the steps spelt out on Wednesday, especially those related to consortium lending, are more geared to address problems specific to the current NPA cycle. “Many of these ideas were proposed by bankers to the finance ministry in a meeting in November. We are glad that they have incorporated our suggestions,” said Anshula Kant, deputy MD and CFO, State Bank of India. She pointed out that most bankers believe there are too many banks in a lending consortium.
The bankers had suggested that only banks with strong balance sheets should be part of the consortium. “We think it will bring more discipline to the process. Also, enforcement of the covenant between the bankers will ensure that the borrowers cannot play one bank against the other,” Kant added. In terms of the capital allocation, Vadlamani pointed out that the priority of the government has been to ensure that all the public sector banks meet the prescribed capital levels after providing for the loan loss provisions in the next few quarters. After meeting this requirement, whatever capital is left, has been given to the stronger banks as growth capital. “The overriding objective of the government is to maintain the systemic stability. There is no contradiction in the government’s stance,” Vadlamani said. Credit ratings agency ICRA said the current capital allocation is based on the capital ratios and the NPA levels of individual banks and ability of these banks to absorb credit losses from their operations.
“Certain banks have received much higher capital in relation to the March 31, 2018 regulatory requirements, which possibly reflects the likelihood of much higher credit provisioning these banks will require on their NPAs during the H2FY2018. While the current capital allocation is higher for weaker banks, the next round of recapitalisation (`64,861 crore in FY2019) could be based on the performance of the banks, with stronger banks receiving higher share of capital,” it said. As far as focusing more on the small and medium enterprises (SME) sector is concerned, Kant said, “We see a window of opportunity in the SME sector. Margins for banks are better in the SME sector. And we cannot ignore the fact that this sector does not have enough access to formal bank credit. So there is a strong case in lending more to the SMEs.” She also contended that at a time when lending to large corporates was in a slow lane, this segment could offer growth opportunities.
However, analysts view some of the measures spelt out by the finance ministry as part of its reforms package as being directed at sections that had so far been neglected and needed to be attended to in the run-up to elections in 2019. Moves such as providing for banking correspondents within a 5 km radius and increasing credit to poorer credit profile small businesses, may prove counterproductive at a time when the focus is on improving quality of assets and the financial strength of banks, especially those under prompt corrective action (PCA), who have been the recipients of a larger share of the recapitalisation resources.