Will bank recapitalisation fix NPAs?
Context-The following article will critically analyse recapitalization of bank by Government.
1.This will give the banking system time to enhance its credit portfolio.
-The move on the part of the government to inject capital of ₹2.11 lakh crore into public sector banks (PSBs) is commendable and a decisive step.
- Reserve Bank of India asked PSBs to work on the recovery process for 12 large exposures which account for 50% of the total non-performing assets (NPAs) worth 8 lakh crore in the banking system, it was expected that by December 2017, the banks would recover about 2 lakh crore. But it’s already November and recovery prospects are eluding and the process may take longer.
-Capital Need- i)The size of the haircuts the system is expected to take will perhaps be much more than the original estimate of about 50% of the exposure amount. This means that there will be additional loss of capital.
ii)Recovery will become more expensive in terms of capital in the banking system.
Therefore, there must have been a view that till the recovery process gathers momentum, more capital would be required.
iii)The economic value, and therefore the value recovered from borrowers, may perhaps grow after 8-10 quarters. At present, the value at which the resolution happens is sub-optimal. The government’s decision to put more capital into the banking system could pay off if the banking system were to hold these assets for this period.
-Focus on clean-up
i)It is significant that capital is being infused into banks.
This could give the banking system a good breathing time to enhance its credit portfolio and restore value out of the NPA accounts.
ii)In next few years,the regulator, banks and the government will have to focus on the quality of public sector banking assets, the NPAs and the recovery.
iii)There has been a broad-brush approach to the quality assessment. The system will have to conduct more analysis, more evaluation sector-wise in terms of its potential for value restoration and enhancement
iv)The last thing the economy and the banking system can afford is a further drop in economic value.
8 lakh crore problem today might grow into a much larger amount.
The quality of governance will play a significant role in this regard. There has not been any worth-while effort on this.
v)There will have to be more reforms to put a higher order of governance in the banking sector. Ensuring performing boards at public-sector banks do become more critical.
vi)The last point which is equally important is that as long as the government wants to hold on to 51% equity in PSBs we cannot have periodic injection by way of recap bonds.
vii)To fund the economy, the government will have to make a yearly budgetary allocation of the amount of capital required by PSBs. Programmes such as Indradhanush and small budgetary allocations will not work. The PSBs need budgetary allocation of at least 75,000-80,000 crore each year.
-However ,the quantum of capitalisation will not enable banks to recover the alarmingly huge bad loans which is the main issue confronting them.
1.Stressed assets-i)The total stressed assets, bad loans, and restructured loans in banks are in the region of 15 lakh crore.
ii)Instead of taking tough action on defaulters, the government came out with a “novel scheme” to foist insolvency and bankruptcy proceedings on defaulters.
iii)This measure is not going to result in the recovery of bad loans. That is why the RBI has asked PSBs to be prepared for a deep haircut, up to 50% of the dues. Recently, on one account, a bank managed to recover just 6% of the total loan amount of Rs. 950 crore. On 12 accounts, the dues are Rs 2.5 lakh crore.
2. Rewarding the defaulter-i) The defaulter promoter can himself bid before the IBC proceedings. Obviously, he is likely to be the highest bidder. So, he will retain his company but will have to shell out less than what he borrowed. This is legal innovation to pay less. But in the bargain, banks will lose huge amounts.
ii)One can safely predict that all banks will be running into losses by the end of the current financial year. Last year, while the gross operating profits were 1,58,982 crore, after provisions for bad loans (1,70,370 crore), the net loss was 11,388 crore. This year, it is bound to be worse.
iii) The IBC is only a ploy to extend favours to big corporates to escape from their liability at the cost of the public exchequer.
iv) If banks would have recovered these loans, their interest revenue would have been more, income levels higher, profits high and they would have generated capital internally out of the profit. That door is closed because banks cannot recover loans through the IBC route. Thus, the banks’ capital gets eroded and the capital adequacy ratio (CAR) becomes adverse.
3.Lending requirements-i)If banks do not have adequate capital, they cannot lend. This would dampen the economy, which is already in the doldrums. Hence to bolster the economy, banks have to be advised to give more loans. To give more loans, more capital is essential. That is why the announcement on recapitalisation.
ii)In the last three years, banks have written off Rs.1,88,287 crore. We have to bear in mind that when banks lose money or when the government recapitalise PSBs, it is all people’s money and out of public savings kept in trust in the banks. People’s money should be for people’s welfare and not to fund corporate default or to recapitalise the banks to adjust these bad loans.
Way Forward-i) For improving governance of PSBs, questions like the tenure of senior management have to be addressed.
This was the recommendation of the Narasimhan Committee of 1991 and 1998. Public Sector Bank chiefs and their managing/executive directors must have a fixed tenure of at least five years.
ii)The second issue is the salary structure of senior management.. To offer incentives by way of very good annual bonus based on performance should enable them to take the right decisions.
iii)The third issue would be of professionalisation through lateral entry at the level of general managers and not at the ED/MD level.
iv)The banking boards need to be manned by professional directors rather than political nominees.
v)Accountability needs to be fixed by removing senior management for non-performance.
vi)There are a few gaps in the regulatory framework as well. One of them is joint lending.
vii)Another issue is the appointment of statutory auditors.This should be like best private sector companies, the auditors are shortlisted by promoters and then assessed by the Audit Committee and Board.
viii) Action must be taken against promoters who have siphoned off funds and transferred them to their personal assets. These assets must be forfeited and the RBI needs to move ahead on that.
This infusion is a welcome step but there are issues that should have been dealt with first. The good part is that after putting this capital, the government’s equity would be close to 70-80% in each PSB. The government could make a huge profit by selling this equity after improving the management of PSBs.