Banking needs urgent consolidation

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Published: November 6, 2019 12:32:36 AM

In a stronger economic environment, lenders might have bounced back, but NPA risks are increasing in power, real estate, telecom

banking system, capital markets regulator, NCLT, NPA cycle, EBITDA, NBFC, HFC, MSME, bad loansFor Union Bank, the divergence was close to Rs 1,000 crore, which meant its losses for 2018-19 were closer to Rs 4,000 crore than the Rs 3,000 crore reported.

How much rot still remains in the banking system, and how little we know about it was evident last week, after the capital markets regulator directed all listed banks to disclose any divergence in provisioning for bad loans within 24 hours of receiving the Reserve Bank of India’s (RBI’s) risk assessment report. Three banks made disclosures. For Union Bank, the divergence was close to Rs 1,000 crore, which meant its losses for 2018-19 were closer to Rs 4,000 crore than the Rs 3,000 crore reported. For Indian Bank too, the divergence was a chunky Rs 820 crore. This is a reality check, and tells us that while the intensity of the non-performing assets (NPA) cycle may have ebbed, the cycle itself hasn’t ended. The larger insolvencies have found their way to the NCLT. But, the continuous downgrades across the corporate and financial sectors seen over the last six months, as also the near-collapse of a co-operative bank, are all proof there could be a few more nasty surprises. A Jefferies analysis showed that there are pockets of problems; the aggregate interest coverage ratio has fallen from 6.4 times in March to 5.6 times in June, and the debt/EBITDA for ‘A’ rated companies looks precipitous at 6.3x.

That calls for a real-time asset quality review (AQR) in which RBI continuously monitors the loan books and balance sheets—of banks, Non-Banking Financial Companies (NBFCs), and also, if possible, co-operative banks. The rigour has to be greater than ever before. And, if it doesn’t look good, which is likely, we need to fast track consolidation.
In this context, reports of a foreign bank wanting to buy a stake in Yes Bank are heartening, and RBI should try and speed up the acquisition. The fact is that asset quality at the beleaguered private sector lender continues to deteriorate, as seen in the Q2FY20 results, and while it may manage to raise more capital, that is not good enough. RBI should have been monitoring the bank, and the transactions of the original promoters a lot more closely than it did, but there is no point crying over spilt milk. Right now, Yes Bank needs much more than just a financial investor; it should be handed over to a sound franchise. The new entity would be in a position to raise capital at a much lower cost. It may sound brutal, but the writing is on the wall. In a stronger economic environment, the lender may have bounced back, but the rapid pace at which credit profiles of companies and NBFCs are deteriorating, is worrying. In the past, the regulator has sometimes waited too long before asking a stronger lender to take over one that has collapsed, or is on the verge of a collapse. Those were better times, and the buyers could endure more pain; today, it will be harder.

It is not just Yes Bank, there are several other weak lenders—whether banks, HFCs or NBFCs—in the system, and this is a good time to facilitate mergers. Many of the smaller private sector banks are in serious trouble. To reiterate, had the environment been more supportive, one could have given them more time to recover, but the risks seem to be increasing, with more NPAs expected in sectors such as MSME, power, real estate, and telecom. With growth slowing and liquidity tight, MSMEs have been among the worst hit, and the stress could be exacerbated because they are not getting access to loans at affordable rates from banks and NBFCs.

NBFCs and HFCs are not able to access loans because of their worsening credit profiles; in fact, today access to liquidity is becoming a big problem. The rate of growth of deposits, too, has been slowing, and only those banks that inspire confidence will be able to attract retail savings.

It is possible RBI is working quietly behind the scenes to minimise the fallout of the defaults in the NBFC sector, but some quick action would restore depositors’ confidence. The DHFL issue, in particular, needs to be resolved quickly since banks have a big exposure of close to Rs 40,000 crore. One more PMC will dent consumer confidence badly. The government did the right thing in initiating consolidation in the public sector banking space. A crisis is a good time to make big changes, and the consolidation of 27 PSU banks into 12 will help achieve scale, lower costs over a period of time, prevent any overlap in products and services, and, above all, strengthen the balance sheets. A big bang consolidation of this type for private sector banks, NBFCs, HFCs will help. The system has too many small lenders, making it inefficient and costly for borrowers. Most pertinently, not all of them may be safe.

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