Beyond the euphoria – Business Line–30.01.2018-1

With weak banks getting a chunk of the capital, it is time to hasten governance reforms at public sector banks

The Centre’s announcement on the bank-wise allocation of ₹ 88,139 crore of capital — ₹80,000 crore via recapitalisation bonds and ₹8,139 crore through budgetary allocation — is welcome on several counts. For one, it reinforces the Centre’s commitment to support weak public sector banks to meet their regulatory capital requirement while providing growth capital to the slightly better performing ones. With the deadline for resolving the first set of large accounts under IBC fast approaching (by March), banks now have the ammunition to take steep haircuts to clean up their balance sheets.

But the manner in which the capital has been apportioned to the 20 PSBs calls for attention. For one, by allocating 46 per cent more capital to the banks under the RBI’s prompt corrective action — owing to their weak capital and higher NPA levels — the Centre has gone against the general perception that bigger and better performing banks would be rewarded with more capital. This is not the first time the Centre has flip-flopped between a need-based and a carrot-and-stick approach while infusing capital. In 2014-15, too, the Centre had attempted to adopt a new criterion to reward efficient banks with more capital. But given the steep erosion in capital, the Centre was forced to loosen its purse-strings the following year. The Centre’s modus operandi this time around is particularly worrying, given that 11 of the 21 PSBs fall under the RBI’s PCA framework. By doling out a chunk of the capital to these banks, it has denied growth capital to more deserving ones. Workings suggest a steep 400-500 basis points jump in some of the weak banks’ capital ratios — more than what would be required to meet the regulatory threshold. Such largesse only indicates that the Centre is factoring in much higher bad loan provisioning in the coming quarters. This begs the question: Are we really at the bottom of the NPA cycle? If not, the Centre’s big bank recap plan could fall flat on its face. It also raises questions on the criteria the Centre would adopt next year, as most of the banks under PCA (based on FY17 numbers) could once again come under the RBI’s watchlist.

The recapitalisation also comes with strings attached, some dissonant with the RBI’s proposed exposure norms to large borrowers; the 10 per cent minimum exposure of a PSB in consortium lending by the Centre will allow only stronger banks to fund large, complex projects. The question of reforms has been hardly touched, although they’ve been on the Government’s agenda for long. The constitution of the Banks Board Bureau spurred expectations of a drastic overhaul in the governance of PSBs. But the BBB has proved to be damp squib, thanks to the Centre’s unwillingness to let go. Unless some of the recommendations of the PJ Nayak committee envisaging more autonomy to bank boards are implemented in spirit, the current recapitalisation exercise may yet again end up throwing good money after bad.

Published on January 28, 2018

via Beyond the euphoria – Business Line

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