Trends in banking: PSB losses absorbed 70% of capital infused in last 3 years

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Mumbai | Published: December 29, 2018 6:12:24 AM

Over 70% of the capital infused by the government in public sector banks (PSBs) over the last three years has been consumed by losses incurred by these lenders, the Reserve Bank of India (RBI) has said while seeking a legislation to do away with RBI nominees on PSB boards.

“This suggests that only if the recapitalisation amount is large enough relative to the total capital base, can it make a perceptible impact on credit growth.”

Over 70% of the capital infused by the government in public sector banks (PSBs) over the last three years has been consumed by losses incurred by these lenders, the Reserve Bank of India (RBI) has said while seeking a legislation to do away with RBI nominees on PSB boards.

“The government has infused capital in PSBs intermittently. In the last three years (2015-18), however, more than 70% of the infused capital was absorbed into losses incurred by them,” the central bank said in report titled ‘Trend and Progress of Banking in India (2017-18)’.

“This suggests that only if the recapitalisation amount is large enough relative to the total capital base, can it make a perceptible impact on credit growth.”

The RBI sought a rehaul at PSBs on the corporate-governance front, invoking the recommendations of the PJ Nayak Committee. The panel has envisaged incorporation of PSBs under the Companies Act and transfer of their ownership from the government to a bank investment company (BIC). Although the Banks Board Bureau (BBB) has been set up, the roadmap of transition to BIC is yet to be laid down and the BBB is yet to be entrusted with the responsibility of appointment of non-official directors, the RBI noted.

The central bank is comprehensively reviewing its guidelines on ‘fit and proper’ criteria for shareholder directors in PSBs which were issued in November, 2007.

The report also raised the issue of the presence of RBI officials on banks’ boards which, in the its view, leads to a serious conflict of interest. “Therefore, there is a need to bring in necessary legislative changes to do away with the requirement of nominating Reserve Bank officials as nominee directors on boards of PSBs,” the RBI said, reiterating a stand it is known to have taken in meetings of its central board.

The report, signed by RBI governor Shaktikanta Das, also defended the capital requirements laid down for banks and the prompt corrective action (PCA) framework for the revitalisation of weak banks. It seemed to respond to the government charge that capital norms for Indian banks are more stringent than those applied internationally by pointing out that cumulative default rates (CDR) in India are higher than those observed globally.

The RBI explained that the Indian banking system has a high proportion of un-provided non-performing assets (NPAs) vis-à-vis the capital levels, even as default and recovery rates have shown improvement after the enactment of the Insolvency and Bankruptcy Code (IBC) and the February 12 circular. “Citing this, there have been calls for reducing the regulatory capital requirement,” the central bank said. “Against the foregoing however, the case for a recalibration of risk-weights or minimum capital requirements would need to be carefully assessed—frontloading of regulatory relaxations before the structural reforms fully set in and conclusive evidence on sustained improvement in CDRs and LGDs (loss given default) is observed—could be detrimental to the interests of the economy.”

The report made a similar argument to defend the existing PCA norms, which the government wants eased. It said the RBI’s PCA framework is modelled on the lines of the US PCA framework, although the threshold of the latter is based on capital whereas in India asset quality and profitability indicators are also tracked. This is essential in the Indian context, RBI said, as historically Indian banks have maintained low provision coverage ratios, have large expected losses that are unprovided for and need ability to generate profits to accrue to future capital.

“As a result, the current level of capital does not capture the additional capital requirement on account of expected future loan losses,” the central bank observed.

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