When finance minister Arun Jaitley meets PSU bank chiefs later today, chances are he will exhort them to step up lending and, needless to say, to cut lending rates to stimulate demand. Since January 2015, while RBI has cut repo rates by 75bps, PSU banks have only cut rates by 25-30 bps—indeed, in the policy before the last one, RBI Governor Raghuram Rajan said he was not going to cut rates till there was some monetary transmission. Given how getting the economy back on track has to be the finance minister’s top priority, exhorting banks to cut lending rates appears par for the course. The problem, as Jaitley well knows, is that banks simply cannot afford to cut rates by much more. For one, they are desperately short of capital which is needed for both growth as well as to provision for bad loans. In such a situation, it is only natural for banks to want to make some higher profits in order to accumulate some capital and clean up their books a little. Equally important, banks take time to cut rates because their costs of deposits take time to get repriced. Indeed, bond yields have hardened by 16 bps since RBI cut repo rates by 25 bps, making monetary transmission that much more difficult.
The real question Jaitley needs to address, and this is what RBI Deputy Governor SS Mundhra brought up in a public interaction yesterday, is of how he plans to recapitalise the banks. According to a Crisil analysis, gross NPAs of banks are likely to rise from 4.3% in March 2015 to 4.5% by March 2016, and even this is likely to mask the true quality—as FE has been
reporting over the past few months, the number of assets being restructured under schemes like 5/25 is increasing rapidly; Crisil is looking at R80,000 crore of assets being restructured under this scheme. Since there will be large slippages of restructured assets which add up to 6.2%of bank assets—the slippages could be as high as 25-30%—that’s a lot of cleaning-up capital the banks will require. All told, according to Crisil, PSU banks need R2.6 lakh crore of capital between FY15 and FY19, a significant portion of which will have to come in terms of equity capital. Apart from the fact
that the government has fallen short on even the limited amounts of capital it promised to infuse into banks, given that many PSU banks cannot raise capital from the market—certainly not while they remain PSUs—
the growth of PSU banks is likely to slow down dramatically. This has already begun to happen. In FY15, the profits of 13 private sector banks outstripped those of 25 PSU banks for the first time in the country’s history—R37,361 crore versus R34,640 crore. In terms of CASA, which largely determines the rates at which banks can lend, private banks have already made large strides and by FY20, Deutsche Bank estimates, their market share will nearly be the same as that for public sector banks. The finance minister needs to lay out a clear road map as to when the government will start exiting PSU banks since this is vital for their survival.