Massive task to consolidate PSU banks

The recent annual bankers’ conclave, the Gyan Sangam, hosted by the Government of India, has come out with an endorsement for bank consolidation so that the behemoth structure of public sector banks can be pared down to render them effective and efficient.

In just a year after the retreat initiative to reflect on the state of the country’s banking industry was announced by the NDA government, the Indian banking sector predominantly led by the PSBs have been the  cynosure for all the wrong reasons. It was only in the Pune conclave that Finance Minister Arun Jaitley appealed to bankers to “take decisions without fear or favor” and asked them to brush aside “extraneous considerations in commercial decisions”. But the third quarter (October-December) 2015 results of the PSBs that were announced in mid-February this year saw most of the PSBs reporting losses after they had to make due provisions for the bad loans or what is euphemistically termed the “non-performing assets” (NPAs). They contributed to the market mayhem where bank stocks were terribly beaten and bruised.  It is an open secret that the NPAs of the two dozen listed PSBs and the State Bank of India (SBI, the behemoth among banks) stood at almost Rs 4 lakh crore at end-December 2015 and provisioning for NPAs has all but wiped out profits. 

More recently, the feisty Finance Minister and his suave deputy have been telling the world that the time had come to dilute the government’s holdings in the banking industry, implying indirectly that those acquiring stakes would be able to rein in responsibly and manage the affairs of the banks efficiently. The statutory bar of government holding not falling below 51 percent is a dampener for dilution of banking stocks, especially when the government’s shareholding in PSBs ranged from 56.26 percent in the Bank of Baroda to 88.63 percent in the Central Bank of India as on March 31, 2014. The issue of stocks dilution provokes bank employees’ animus, hence the leeway for deep dilution of government’s ownership in many PSBs even to the extant limits, is bound to be bristled with difficulties.

As a step to bolster the stocks of the PSBs and to stay them in conformity with capital adequacy norms, the subsequent days saw the Budget making a provision of Rs 25, 000 crore for recapitalisation of banks for the next fiscal year after their bad loans were written off to the tune of Rs 1.14 lakh crore in the current fiscal itself. Be that as it may, these are only palliatives and the deeper agony of surgical intervention to stem the rot can no longer be delayed by policy-induced aberrations. 

That is why Jaitley proposed in the latest Gyan Sangam that the country right now is in urgent need of stronger rather than a large number of minnow banks that do not know how to get themselves on in the competitive milieu where private banks without any such public obligations do better than them in terms of operational capabilities and securing substantial income and gains. His remarks that consolidation in the banking sector was discussed at the meeting and bankers themselves plumped for it by suggesting an expert group to look into the issue are signals to what the next course of action from the authorities would be. Another idea that flowed from the retreat is to treat the public sector employees with Employee Stock Ownership Plan (ESOP).    

Now reports are rife to the effect that the government would zero in on six to ten public sector banks which would drive the consolidation process among the PSBs. Dubbed the anchor banks, larger lenders like the SBI, Bank of Baroda, Punjab National Bank and Canara Bank could qualify to be the anchor banks and the real ones would be known before October this year, official sources have reportedly said. It is interesting to recall that in the first Gyan Sangam, bankers had resented the consolidation concept on the alibi that the financial health of most of the banks had worsened and no one could be in a position to take the strain of adding any equally weaker brethren to it! But this time, around, none of the bankers openly opposed the move as the government indicated in no uncertain terms that it could not go on supporting them through capital infusion if they are not leaner and fitter by consolidation to stay in the business! The ground reality that the days of being the sovereign crutch of the government are numbered, dawned on the banks and they had to bite the bullet!   

Be that as it may, the recently released Staff Report for the 2016 Article IV Consultation with India (in which the IMF holds bilateral discussions every year with its team meeting officials of the member country on the latter’s economic development and policies) flagged off key policy issues that have a bearing on India’s banking sector. Without mincing words, the IMF said elevated corporate sector risks and weakened banking balance sheets, especially for PSBs, pose “headwinds for economic growth”.  

It said with corporate sector(non-household lending) accounting for over 80 percent of banks’ credit portfolios, banking sector soundness and its ability to finance investment and growth rest on the financial health of the domestic corporate sector. 

Stating corporate vulnerabilities remain elevated reflecting implementation delays and cost overruns in infrastructure projects, it said these pose challenges to effective debt restructuring. The share of debt held by firms with weak debt repayment capacity (interest coverage ratio below one) remains close to a decade-long high, at about 11 percent as of end-March 2015. Industries subject to greater stress, particularly those with weakened debt servicing capacity—including infrastructure, textiles, iron and steel and mining—account for nearly one-third of banks’ total loans and more than half of banks’ stressed assets, according to the Fund. The share of PSB’s stressed assets—including gross NPAs and restructured assets—in total advances continued to increase to 14.1 percent at end-September 2015 from 12.9 percent a year earlier.

The IMF study of India’s banking ailments underlines the need for “full recognition of risks on PSBs’ balance sheets, adequate capitalisation and further governance reforms” for bolstering the banking sector going forward. So, more than ritualistic retreat to highlight the known problems that have been well –documented by both domestic and global institutions of repute, the consolidation move needs to be seen in this painful perspective. How far is this feasible? Given the numerically minatory unions banks possess is a moot point. But, the government must be resolute to ram home the message that business as usual in the banking industry is no longer an option to be exercised as a right by its restive banking employees, policy wonks wonder.