The NDA government, after campaigning for change and receiving a clear mandate, has asserted that it will not let state holding in public sector banks go below 51%.
Indian business leaders have backed Narendra Modi in the hope that he will take forward reforms but the privatisation of State-owned banks is one reform which is nowhere in sight. This policy of persisting with public sector banks (PSB) comes at a huge cost. PSBs have in the last few years seen a sharp rise in their non-performing assets (NPA) — their net NPA ratio going up from 0.94 in 2008-09 to 2.02 in 2012-13. Some of this will have to be written off, eroding their capital base, which will need replenishing. Besides, more capital is needed simply to grow. Simplifying it a little, with a capital adequacy ratio (CAR) of, say, 9%, a bank will need Rs. 9 more of capital for every additional Rs. 100 it lends. What is more, to meet the more stringent Basel III capital adequacy norms, which are round the corner, even more capital will be needed to do the same level of business. According to one estimate, the country will need to recapitalise its banks in the next three years by a staggering Rs. 3.5-4 lakh crore. This is around 30% of the entire revenue receipts projected in the 2014-15 budget and 4% of GDP. Well over half this bill has to be footed by the government because of its holding in PSBs, which is in the 55-82% range. Putting this kind of money into banks will make a significant dent in the government’s fiscal resources, setting back its agenda of achieving fiscal consolidation — a key element in making a long-term dent on inflation still running high. Is this worth it? What does the government gain from continuing to own around 70% of the banking sector? Bank nationalisation served a purpose by taking banking to parts of the country (non-commercial centres) and sections of the economy (agriculture and small scale industry) that were earlier ignored by commercial banks. As a result, India’s savings rate improved and the foundation for industrial development at the grassroots was laid. But it came with a cost: Poor customer service, a privileged set of employees with low productivity, lack of professionalism in management, politically directed lending like loan melas and high NPAs once the true picture of banks’ financial condition was revealed during the post-1991 banking reforms. What does the government get out of owning 26 PSBs today? Having taken the spread of banking up to a point, India’s commercial banks, of which PSBs are a part, have failed to deliver in the final leg — achieve financial inclusion. Urban-centric commercial banks are simply unable to take banking to poor illiterate people, who are intimidated by paper work and have to sometimes forego a day’s earnings to get done something at a bank branch, which can be several kilometres away. Hence the banking regulator, Reserve Bank of India, has come up with the idea of limited banking (banks which are not full-fledged commercial banks) like payments banks, small banks and banking correspondents. This is where development activity today lies. What is more, PSBs have in the past few years emerged as a key link in the chain of crony capitalism with corporate debt restructuring seen as a major tool through which senior bank managers play along with corporate clients even as NPAs of PSBs rise at a disturbing rate. Anecdotal evidence suggests how this works. Agents of business houses lobby with senior officials and ministers for the appointment of particular individuals as executive directors and chiefs of PSBs. On getting the position, such bankers pay back in the following ways. They sanction new loans to firms of the business houses, restructure earlier non-performing loans, which entails a loss for the bank, with some of the loans eventually having to be written off, by which time the bank officials in questions may have retired or moved on. The recent arrest of a PSB chief who was sought to be bribed by a steel maker with high debt and its managing director highlights just one aspect of the reality. If the time has come to disentangle PSBs from the web of corruption, they have to be professionally run and sink or swim on the basis of their performance. This is best done if the government does not own them. If this is accepted then the next question is: Should all 26 PSBs be privatised or should we stop somewhere in between? A case can be made for a different status, somewhere in between public and private ownership, for a few large PSBs. Maybe three or four like State Bank of India, Bank of Baroda, Canara Bank and Punjab National Bank can be given the status of national banks so that they can discharge a public function during a national requirement. SBI, for example, during times of external crisis has raised hard currency from around the world by issuing paper like India Development Bonds and Resurgent India Bonds. How can this be done without the government being involved in the day-to-day running of the organisations? One route is for the banks to be privatised, with the government retaining a golden share. Britain adopted this device when under Margaret Thatcher it issued itself a golden share while privatising the British National Oil Corporation so that it did not fall into undesirable (read foreign) hands. The government can say that it will exercise the right of holding the golden share only by publicly announcing a specific task when a particular exceptional situation arises. For the rest these banks will follow their own agenda within the central bank’s monetary policy framework. Most importantly, they will be run professionally and senior appointments made by their boards and shareholders like any other private bank. Subir Roy is a financial journalist and has also worked in the SBI
Smaller firms now add to banks’ debt recast load -FinancialExpress
Close to Rs 37,050 crore of loans have been approved for a debt recast by the corporate debt restructuring (CDR) cell in the six months to September 2014, indicating that the stress in corporate India continues unabated. While the amount restructured in the first half of FY15 is smaller than the Rs 58,158 crore seen between October to March 2014, it is nevertheless fairly high.
What’s worrying is that most of the requests for loan recasts are coming in from smaller companies. According to data compiled by the CDR cell, 16 accounts were referred to it in the six months to September amounting to R16,020 crore.
PK Malhotra, deputy managing director (stressed assets management) at State Bank of India (SBI), told FE that a year ago it was mainly infrastructure accounts that were being referred to the CDR cell. “Right now, it is primarily companies from the textile and pharma sectors which are less leveraged that are seeking more lenient repayment terms,” Malhotra said.
UCO Bank chairman Arul Kaul said that the reason more smaller accounts are being recasts is because most large accounts have already been restructured. A senior banker at Bank of India observed that with the joint lenders’ forums (JLFs) now a regular feature, not every stressed case was going to the cell.
“Moreover, since the window for restructured accounts to be labelled standard and not an NPA ends on March 31 next year, banks are going slow on recasts,” said a senior banker at Bank of India.
Accounts that were admitted to the cell between April and September include Shriram EPC, whose debt of R2,400 crore has been recast. Bankers point out that there are not too many large cases as there were last year such as Lanco Infra where R7,300 crore was restructured and Electrosteel's R6,400-crore recast. One reason for this, bankers believe, is that any trouble spotted in a large account is being attended to quickly at a JLF well before it becomes an NPA.
In September, the largest account referred by bankers for recast was R1,630 crore from JKC Projects, followed by Surana Corporation with a debt of R1,130 crore. On the approval front, September saw 12 cases worth R12,200 crore being cleared with ACL Textile R1,240-crore loan leading the pack, followed by Base Corporation's R1,030 crore.
In July, bankers had referred loans of companies like Soma Isolux NH1 Tollway (R2,070 crore), Base Corporation (R1,030 crore) and Ankit Metal and Power (R900 crore) for a restructuring. “With most of the larger cases having been dealt with, smaller exposures that are stressed are in focus,” said Nirmal Gangwal, managing director at Brescon Corporate Advisors.
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