The NDA government has been talking of privatising at least two public sector banks (PSBs), and will, hopefully, work towards that end, disregarding the somewhat outdated and irrational views of the parliamentary standing committee on finance. The panel believes the current stress in the banking sector is transient. Rather than allowing this temporary pain to be an alibi for privatising state-owned banks, it suggests these lenders be empowered to deal with the present challenges.
This is the same panel that observed, in another report, that recoveries from stressed asset resolution were low, and the haircuts steep. Now, it says that as most of the large legacy bad loans get resolved, either through bankruptcy resolution process or outside it, recoveries will help the banks to shore up their balance sheets.
This is wishful thinking. The Reserve Bank of India’s stress tests indicate the gross non-performing assets (NPA) ratio of PSBs could edge up to 12.52% by March 2022, from 9.54% in March 2021. This may sound better than the earlier scenarios, but it is certainly nothing to be complacent about. In fact, this is merely the baseline scenario.
The results for Q1FY22 suggest there is a build-up in stress both in the MSME and retail sectors. Headline slippages at Punjab National Bank (PNB), for instance, are running at a high 6% with the net NPA ratio at an elevated 5.8%, while the loan growth was an anaemic 1% year-on-year (y-o-y); asset quality has deteriorated across retail, SME and agri loans. Indian Bank’s gross NPA ratio is 11.5%, down from 14% a year ago, but not low by any standards. Bank of India’s gross NPA ratio was more or less flat at 13.51% at the end of June, compared with 13.91% a year ago; again, these are not low levels of stress. Again, at Canara Bank, the gross NPA ratio at the end of June was 8.50%, only a shade lower than the 8.84% a year ago.
Let us not get carried away with the jump in profits in the recent quarters, because a good part of these is the result of lower provisioning; the clean-up that began with the asset quality review (AQR) in Q4FY16 is starting to taper off, boosting the bottom-line. For instance, State Bank of India’s loan-loss provisions fell 26% in FY21, to a little over Rs 31,000 crore.
In Q1FY22, the drop was 15% y-o-y while the growth in the net interest income was a mere 4% y-o-y. The fresh slippages during the quarter were 2.7%—SME and retail, primarily—indicating there are many pain-points.
Recoveries can help PSB balance-sheets only up to a point. Ultimately, to survive and run efficiently, the most pronounced is that of growth capital, for which most state-owned banks are dependent on the government. Thus, precious taxpayer money will be needed to capitalise them. PSBs are estimated to have written off close to Rs 8 lakh crore worth of loans over the past seven years; that is more than twice the capital that the government has invested in them (Rs 3.37 lakh crore).
Much of this has been by way of re-capitalisation bonds, which is an unhealthy practice. It is a tough situation; as long as the government is the primary shareholder and in control, investors will be reluctant to take big bets on public sector banks. That, then, puts a lid on their valuations and the government is forced to keep on pumping in capital.
The parliamentary panel believes large, legacy non-performing assets need to be segregated for resolution, and the balance-sheet of banks sanitised, allowing them to move on. If the recoveries are going to help restore balance sheets, where is the need to segregate the assets? In any case, the National Asset Reconstruction Company (NARCL) is a reality, and around `2 lakh crore of assets are expected to be transferred to it, though one is not sure how many cents to the dollar the assets will fetch. Again, taxpayer money will be involved since the government proposes to provide a sovereign guarantee of around Rs 31,000 crore.
In any case, simply taking bad loans off the books of public sector banks will not make them more efficient. Doing business, in the years ahead, is certainly not going to get easier. Today, state-owned lenders may have a clear advantage over their private-sector counterparts when it comes to garnering deposits, but they are losing market share. PSU-banks’ share of deposits fell to 68.5% in FY20, from 69.24% in FY19, while their share of loans and advances fell to 62.1% from 63.9%. In FY21, loan growth at PSBs was a paltry 3.2% while, for the private sector banks, this was 9.9%. It is unlikely they will be able to generate the surpluses needed to invest in technology—and to constantly upgrade it—to facilitate digital banking.
Technology will be critical for banking in the years ahead, and the PSBs have let the private-sector banks take the lead on this. The bigger problem though is control and interference by the government, which prevents PSBs from hiring enough talent needed to stay competitive in the current environment. They will, thus, continue to be hobbled by outdated systems and practices.
India should have reversed the ill-advised 1969 bank nationalisation policy in 1991 when the economy was liberalised. Three decades later, most PSBs need support. Too much taxpayer money has been spent on them, it is time to let them go.