Consortium lending caps, limits on loans by weak banks, separate NPA cell, segregate appraisal & recovery, etc.
The slew of banking reforms announced on Wednesday, along with the much-needed front-loading of bank recapitalisation bonds—the bonds will have no impact on the fiscal deficit, save for the interest payments on them—if implemented well, will mean a big change in the way PSU banks perform. The decision that each bank participating in a consortium will have to hold a minimum of 10% of the loan means that smaller banks will no longer be free to simply piggyback on the business generated by larger banks and will have to find their own lending sources. Indeed, smaller banks have been advised to reduce their exposure to the corporate sector—ideally, this should not be more than 40% of their total risk-weighted assets by March 2019. Banks have also been directed to ensure that all regulatory approvals and all backward/forward linkages are in place before they lend—this seems like very basic hygiene, but a large part of current infrastructure NPAs are due to banks not doing this before disbursing loans. Though it is not clear who Agencies for Specialised Monitoring (ASM) will be, and whether they will bear part of the responsibility for a loan going bad, but banks need to use them for any loan over Rs 250 crore; in addition, any covenant that is breached in even one bank will have to be red-flagged to all consortium members.
In an attempt to increase transparency and responsibility, banks will have to separate the teams appraising a loan from those monitoring it and recovering the money—this ensures those who appraise a loan do not have the capacity to try and cover the fact that it is not a performing loan. Banks, in fact, have been told to form a special recovery cell for stressed assets and to give suitable incentives for better recovery—how big the incentives are to be will be decided by the bank’s board. In an attempt to ensure banks who frittered away their money—and are now under RBI’s Prompt and Corrective Action (PCA) category—do not do this with the recapitalisation bonds they receive, these banks will get just enough capital to keep them compliant with RBI’s prudential norms. If they are to lend, this will have to be from the recoveries they make or from the money raised by selling non-core assets.
In the event, things should be better for PSU banks since, there is already the RBI directive that they need to reduce exposure to single firms to 20% of the bank’s capital base—and 25% for the entire group—by April 1, 2019 and, thanks to the insolvency code, the power has in any case shifted away from borrowers to banks. But, given PSU banks have lost their share in CASA deposits from 55% in FY07 to 43% in FY17, it is not clear if these reforms are enough since, with increased competition from fintech firms and presence-less banks like Kotak’s 811, their share looks like it will further reduce; the dramatic shift to borrowing in the bond markets by top corporates is a part of this changed environment.
The absence of anything about closing unviable bank branches or full freedom to hire the right people—and at the right salaries—is a big dampener given how critical these are. Certainly, an election year is not the right time to risk the wrath of unions by talking of privatisation, but if PSU banks are going to lose market share—in deposits and loans—isn’t it a better idea to privatise them sooner rather than later? The fact that the government hasn’t been able to lower its stake in even IDBI Bank to below 50%—a promise made in the 2016-17 budget—is a reminder of the wasted time in bank reform.