Public sector banks(PSBs), barring a handful, have not been on the radar of the investor community
for a while. After the latest quarterly report, hopes of a revival have now
turned into a distant dream. Not only are the reported numbers weighed down by burden
of bad asset provisions, the core performance is weakening incrementally in
every quarter. Looking at the magnitude of the losses, the much-talked-about
capital infusion by the government appears grossly inadequate. While most of
the PSUs are fast losing their relevance in the financial system -- which is
proving to be a bonanza for peer private banks and NBFCs – the slow and sure
death of these entities may have growing fiscal repercussions that the
government can ill afford.
Weaker-than-expected
Q4 FY18
The dozen PSU banks
that have reported earnings so far have on an aggregate reported a net loss of
Rs 31,874 crore as against a net loss of Rs 6,882 crore in the previous quarter
(Q3 FY18) and a net loss of Rs 1,506 crore in the year-ago period. While the
number of Punjab National Bank pulled down the aggregate, it is
pertinent to observe that only two (Indian Bank and Vijaya Bank) out of twelve banks reported a net profit.
Core performance
continues to remain weak. Muted business growth, interest reversal on account
of accelerated NPA (non-performing asset) recognition and competitive intensity
contributed to pressure on net interest income (difference between interest
income and interest expenses).
The rise in yields on
government securities led to much lower treasury gains and with apparently no
respite on the cost head, the core operating profit shrank further.
Consequently, while six banks reported a positive growth in NII, the growth in
pre-provision profit (core operating profit) was reported by only three from
the group.
Business
– fast losing market share
In terms of business
growth, the picture looks dismal as well. As the exhibit suggests, barring
mid-sized PSU banks like Indian Bank and Vijaya Bank, the rest have not
participated in lending in any meaningful manner. In deposits, while the
absolute share of this dozen is still 27.6%, the incremental share in deposits
is much lower at 18%. In advances, while the outstanding share of these twelve
entities is a little over 25%, the incremental share has fallen to 10%.
As most PSU banks lose
market share in new business, partly constrained by lack of capital to grow
balance sheet, they will have incrementally less access to earnings from new
assets to pay for the toxic assets created in the past. It is a vicious cycle
whereby any incremental capital infused in these entities will get into
creating provisions for bad assets, thereby leaving very little to expand the balance
sheet and compete in the market.
PCA
Banks – a report card
The government’s
much-talked-about Prompt and Corrective Action (PCA) deserves a mention here.
So far eleven banks have been put under PCA owing to their weak fundamentals
(high NPA, weak capital etc) and certain restrictions have been imposed on
their functioning with an objective to nurture them to health. In fact, in the
recapitalisation exercise, the PCA banks were given much higher doses of
capital on the assumption that the better performing ones will have access to
capital from the market.
If we look at the performance of banks under
PCA that have reported their earnings so far, no signs of improvement are
visible yet.
As our back-of-the-envelope calculations suggest, if these weak
banks keep losing market share, in couple of years they will not generate
enough from their core earnings to pay for their operating expenses including
salaries. This will have its fiscal repercussions as well.
Is
capital infusion the answer?
Blanket doses of
precious capital infusion into weak banks may not nurture them to health.
Recapitalisation without reform is likely to be a costly and futile exercise.
If governments want to
run banks, they should do it with well-qualified officers equipped with the best
financial and legal know-how, drawing market-linked remuneration. There should
be a dedicated cell within each bank to assess company/domestic and global
macro developments. Banks should have a strong internal rating agency and
employ the best available IT systems and data analytics. And, as the root cause
of weak corporate governance in PSU banks at the highest level is directly
linked to the very process of appointment of top officials, this issue of a
nexus between politicians and lending needs to be addressed first.
With
most PSU banks having lost their relevance already, infusing precious
taxpayers’ money into moribund entities may be a populist and not prudent move.
Massive reforms to create stronger larger well-managed entities is the need of
the hour.
Source- Moneycontrol
