Public sector banks (PSBs) have
played a pioneering role in developing India's industries, but recent evidence
suggests they are being shortchanged. Large infrastructure projects have been
bogged down by legacy issues, regulatory overreach, and negligence on the part
of banks, which has only led to the pile of bad debt becoming bigger.
The rise in the level of non-performing assets (NPAs) has
consequently led to more public money being injected into government banks to
meet capital requirements. Provisioning for bad loans has impacted their
profitability and growth. Private banks have been relatively more successful
than their state-run counterparts in leveraging market forces to raise capital.
The gross NPA ratio of scheduled commercials banks rose from
10.2 percent at the end of September 2017, to 11.6 percent at the end of March
2018. Private banks fared much better during the period under review with an
NPA ratio of only 4 percent; PSBs gross NPA ratio at the end of the period was
15.6 percent.
The government had formulated the 'Indradhanush' plan in August
2015 to resolve the issues faced by PSBs, and make them more competitive
vis-Ã -vis private banks. The seven-pronged action plan to revamp PSBs
identified both structural and policy issues that were holding back these
institutions from living up to their mandate.
On the structural side, governance issues, NPAs, and a
homogenous credit base have held back state-run banks. The Indradhanush plan
estimated that recapitalisation to the tune of Rs 1.8 lakh crore was needed to
nurse these banks back to health.
This amount was to be released in a staggered manner, spread
over four years. Of the total, Rs 70,000 crore would be infused into banks by
the government, while the remaining Rs 1,10,000 crore would have to be raised
by banks. The government has already injected Rs 59,435 crore of the total in
public banks, with the residual amount to be raised through budgetary
provisions.
In January 2018, the government
mooted a front-loaded bank capitalisation plan of Rs 2.11 lakh crore to augment
the Indradhanush plan. Of the total, Rs 1.35 lakh crore was to be infused
through sale of recapitalisation bonds, while the rest would come from
budgetary provisioning and through funds raised from the market.
Public
banks have been the beneficiaries of government aid, especially since the
market liberalisation reforms of 1991. Union budgets presented in the last five years
have earmarked money for bank capitalisation, of which Rs 83,504 crore has been
spent. However, the budgetary provision for FY18 was Rs 90,000 crore, much
more than the expense incurred over the last five years.
The diversion of
public funds for keeping state-owned banks afloat is indicative of the systemic
flaws that have culminated in mounting bad debt and over-leveraged balance
sheets. Institutions like Life Insurance Corporation of India (LIC) have also
been used as surrogates to stave off crisis in these banks.
The quantum of direct
government support to the banking sector has increased by over 450 percent over
the last four fiscal years, from Rs 15,504 crore in FY14 to Rs 86,510 crore in
FY18. For the current financial year, Bank of India received the most
government aid, having received at Rs 9,232 crore. It was followed by State
Bank of India (SBI), which received Rs 8,800 crore.
The
capital infusion by the government is broadly in line with the net losses
reported by state-run banks. Of all the PSBs in the country, only Indian Bank and Vijaya Bank recorded profits in FY18.
Cases of financial fraud, most notably, the one orchestrated by Nirav Modi and
Mehul Choksi, pulled down the performance of Punjab National Bank, which recorded a loss of
Rs 12,283 crore, the highest among PSBs. In FY18, SBI and its associates
received Rs 8,800 crore in cash from the government, while recording a loss of
Rs 5,339 crore for the year.
Of the 21 public banks in operation, 19 reported losses this
year, resulting in numerous calls for their privatisation.
Despite the government
having increased its allocation for recapitalisation of these banks by a
not-so-modest amount, they are still being found wanting. Their gross NPA
ratios have swelled in the recent past, with IDBI Bank reporting
a GNPA ratio of 27.95 percent at the end of the June quarter, up from 24.11
percent as at the end of the same quarter last year.
The same is true in
the case of United Bank of India, whose GNPA ratio rose by almost 7
percentage points over the past year. PNB's bad loans also spiked, with GNPA
ratio increasing to 18.38 percent of its asset base.
Factoring in possible losses
from restructured assets and additional provisioning, it would be safe to
assume that more money will be need to be pumped in to ensure that public banks
meet capital adequacy norms.
Source- Moneycontrol
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