Public sector banks (PSBs), led by the biggest lender, State Bank of India, have been declaring huge losses for the December quarter. Collectively, 30 banks reported a net loss of Rs 154 crore, whereas they made a profit of Rs 10,237 crore in the corresponding quarter in 2016, thanks to PSB losses that more than offset the profits made by private banks, finds CARE, a rating agency. PSBs are required to make higher provisioning for bad loans that are referred to the bankruptcy courts. Reportedly, PSBs have made higher provisions of about Rs 51,000 crore in the third quarter.
The government has committed to recapitalise banks to the tune of Rs 2.11lakh crore over this year and the next, based on an assessment of the loans that are at risk of having to be written off.
Curtailing the haircut that PSBs have to take while resolving bad loans will bring down the extent of recapitalisation needed, and lower the burden on the taxpayer. This, in turn, calls for creating a competitive market for stressed assets. There is no reason why private equity and so-called vulture funds cannot finance the purchase of stressed assets. Similarly, the Employees’ Provident Fund and the National Pension System can set up special funds that can bid for stressed assets being sold at a steep discount to their replacement cost. Public sector companies too can pool in their surpluses and bid for these assets. Similarly, banks can set up special purpose vehicles, buy the assets, and enter into, say, management contracts with companies that can run the business, and sell it later. The point is to create more financial investors and greater competition that can help minimise the haircut for the lenders.
The CARE study showed that a marked reversal in treasury income paced up by hardening bond yields was a big setback. The largest lender SBI has reported a loss ofRs 2,416 crore for the December quarter against Rs 1,820 crore profit in the year-ago quarter. Swifter resolution of corporate distress should be accompanied by more reforms to give banks operational autonomy to bring them at par with well-performing private banks.
This piece appeared as an editorial opinion in the print edition of The Economic Times.
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via Stressed banks need a market for assets