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Capital infusion is all very well, but what’s the long-term strategy for ailing state-run banks?

February 21, 2019 / 03:34 PM IST
 
 
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Madhuchanda Dey
Moneycontrol Research


Highlights
The fresh capital is sorely needed by weak banks
- The government has shied away from reforming state-run banks
In the absence of reforms, the infusion is a drain of resources
The capital infusion won’t move the needle on lending
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In an attempt to take a few more banks out of the Prompt Corrective Action (PCA) list and provide sorely needed oxygen for the survival of a few others, the government has announced a fresh dose of capital infusion in a dozen public sector banks.

Sure, the capital is needed to keep many of them afloat. But if the intention is to unclog credit channels to compensate for the loss of lending from stressed sectors such as non-banking financial companies (NBFCs), then it isn’t going to move the needle.

The government’s approach to tackling the issues that afflict public sector banks has been half-hearted and ad hoc. The upshot is a slow and steady drain of resources into underserving banks, with no long-run solutions in sight. Investors can only dream that one day the government will show the courage to tackle the issue head on with drastic and bold reforms, such as closing unviable banks and smartly reviving only few large ones. But that will be a pipe dream.

On February 20, the government infused close to Rs 48,239 crore in 12 public sector banks.

psu1

The capital was a dire necessity for survival for many of these entities as their capital was below the regulatory requirement.

psu2


Managing PCA Initially, 11 banks were under PCA. So far, the government has roped in Life Insurance Corporation (LIC) as saviour for IDBI Bank and merged Dena Bank with Bank of Baroda and Vijaya Bank. The fate of the rest was unclear.

In a bid to prove that many of the ailing banks have been successfully nurtured to health, three banks -- Bank of India, Bank of Maharashtra and Oriental Bank of Commerce -- were taken out of the PCA ambit recently. The drop in their net non-performing asset (NPA) ratio to single digits – 5.87 percent for Bank of India, 5.91 percent for Bank of Maharashtra and 7.15 percent for Oriental Bank of Commerce -- might have emboldened the regulator.

Of the remaining six banks, only Allahabad Bank has managed to reduce its net NPA to 7.7 percent. The rest still have double-digit net NPA ratios.


Lacklustre performance continuesThe core performance of banks, which were the beneficiary of the latest round of capital infusion, has remained anaemic. The group as a whole reported a net loss of over Rs 12,447 crore in the December 2018 quarter, similar to what it had reported in the previous quarter as well. Only four out of the 12 banks had reported profits.

However, thanks to the regulatory diktat, their provision coverage has improved significantly to 56 percent and the amount of fresh bad loans has declined.


Will the capital infusion drive loan growth?Simply put, that is the pie-in-the-sky. The state-run banking pack as a whole is losing market share in a big way. In FY18 for instance, while their absolute share in deposits was 72 percent, their share in incremental deposits of the system was only 28 percent. The picture is even more dismal with advances, where against an absolute share of 65 percent, their incremental market share was only 17 percent.

Well-capitalised private banks are making rapid strides with a superior liability profile. Low cost deposits, which were once the forte of state-run banks, are now being grabbed by their private counterparts. The well run private banks are cornering better quality assets, with low cost of funds.

In short, the structure of our banking system is rapidly changing and the infusion of dribs and dabs of capital can do little to shift the centre of gravity towards state-run banks.

Providing additional capital, without proper governance, and a thorough functional rejig of state-run banks runs the risk of money going to the not-so-credit worthy and could well sow the seeds of the next crisis.

Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here

Madhuchanda Dey
Madhuchanda Dey
first published: Feb 21, 2019 03:34 pm

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