Indian Banking: Stressed times

Baptism by fire is a concept that Piyush Goyal must be used to by now. Since 2014, every ministry that Goyal has shepherded has had to deal with a host of legacy issues that needed immediate resolution.

Whether it was the financially stressed power sector assets, which were on the brink of shutdown in 2014, the shortage of coal or safety of railway infrastructure, in the last four years, Goyal has emerged as the chief firefighter for Prime Minister Narendra Modi. He hasn’t always been successful but no one can blame Goyal for sitting on a problem.

His latest role, taking additional charge of the Ministry of Finance and Corporate Affairs till his predecessor Arun Jaitley recovers from a kidney transplant operation, perhaps offers the biggest challenge yet, to state the obvious. Public sector banks are already in the throes of a major crisis with the Reserve Bank of India closing all exit doors on restructuring of non-performing assets, and the government finding it difficult to raise enough capital to bail out the banks.

To prevent public sector banks from going bust when they breach regulatory norms on minimum capital, the RBI has set several stringent restrictions on loan advances, distributing dividends, remitting profits among others are applied. In some cases, the owner may also be asked to infuse capital into the banks, which in case of the  public sector banks, is the government.

Already more than half of the country’s 20 public sector banks are under the Reserve Bank of India’s Prompt Corrective Action (PCA) framework which among other restrictions also constrains the ability of these banks to lend. With lending drying up, most of these 11 banks, whose primary clients are micro, small and medium enterprises (MSMEs), will find that their net incomes and margins are coming down drastically. The reason is simple: while they will have to fork out money to the existing depositors, no money will start flowing in from new businesses.

Compounding the problem is the fact that these banks will require higher provisioning as and when their non-performing assets rise and hence there will be a greater need for capital infusion than previously expected. And with Basel III norms coming into play from March 31, 2019 (according to RBI guidelines), which calls for an additional buffer of 2.5% for risky assets, the outlook for banks look far more clouded than before.

Goyal, known as a man of action, decided to take action just days after taking up the additional charge as the Minister of Finance. While expressing confidence that the banks will come out of the PCA framework soon, Goyal also recognised that banks need to keep lending to the MSMEs in particular to ensure that the economy at large is not affected.

“The RBI has set some parameters for banks to come out of PCA. That’s a long process…But to strengthen the banks and ensure that micro, small and medium enterprises keep getting adequate working capital and loans so that their business is run smoothly, we held fruitful discussions,” said Goyal after meeting the heads of banks under PCA.

“Over the next few days we will ensure that the central government gives every possible support to further strengthen the resolve of these banks to come out of PCA framework as quickly as is possible,” Goyal stated adding that the priority of the government is to get the banking system back on its feet and shed the legacy it inherited from the Congress-led United Progressive Alliance-II government in 2014

The legacy issues he refers to are the large amounts of loans given by these banks to sectors like power, steel and telecom, which have subsequently been unable to repay their debts as the economy slowed down affecting each of these industries. According to data from the Ministry of Finance, the gross advances of public sector banks increased a whopping threefold in just six years to Rs 52.15 lakh crore in March 2014, compared with Rs 18 lakh crore in March 2008. By March 2017, this figure grew to Rs 58.65 lakh crore. Out of this, Rs 7.33 lakh crore was recognised as non-performing assets.

At the meeting of the 11 public sector banks under PCA with Goyal, sources said bankers asked for more capital over and above the Rs 2.11 lakh crore recapitalisation programme for public sector banks announced in January this year. Analysts at ICICI Securities estimate that 65% of the Rs 88,100 crore capital allocated by the government to the public sector banks as part of the recapitalisation programme in 2017-18, has already been ‘eaten up’ in the fiscal 2017-18 losses.

In an election year marked by rising prices of crude oil, Goyal may not have enough headroom to increase budgetary allocation for the capital infusion. While banks coming out with recapitalisation bonds would be an off-Budget exercise, the interest on these bonds would be recognised in the budget and further affect the fiscal position of the government. So Goyal has a tough balancing act ahead of him; infuse more funds in the banks and at the same time see that the economy does not get derailed because of lack of access to funds.

The numbers are worrying. According to the latest available data with the Reserve Bank of India, credit growth to the MSME sector is almost flat as on March 31, 2018 at 0.4% with outstanding loans of Rs 4.76 lakh crore, compared with Rs 4.74 lakh crore on March 31, 2017. The fact that in today’s environment each and every loan advance is being scrutinised in the public eye does not make things easier for companies seeking finance. From 2014-17 alone, 118 cases were filed with the Central Bureau of Investigation on suspicion of banking frauds.  All factors point to the fact that banks have become more risk averse and willing to sit on cash rather than disperse it to those in need.

The knock-on effects are visible. On May 11, the latest statistics from the Central Statistics Office revealed that industrial output growth measured through the Index of Industrial Production (IIP) slowed to a five-month low of 4.4% in March. For 2017-18, the growth in IIP at 4.3% was slower than the previous year when growth was 4.6%.

With a cloud of PCA hanging over more public sector banks like Punjab National Bank, Andhra Bank, Union Bank of India, Punjab and Sind Bank and Canara Bank, the road to recovery appears to be long and arduous. If there are green shoots of recovery in the Indian economy, there appears to be a lack of capital to nurture them. Over the next few months, Goyal will have the unenviable role of balancing the government’s finances while taking care of the public sector banks but more importantly, he would have to find an answer to the credit crunch plaguing the economy. Sources in political circles say Goyal could be the Minister of Finance full time if Prime Minister Narendra Modi and the BJP win again in 2019. If that be the case, the learnings of leading the economy at such a tricky junction as India finds itself in 2018-19, would hold Goyal in good stead.