Even as the government has progressively stepped up its capital infusion in state-owned banks throughout the last decade, the lenders have seen their bottomlines take a steady slide. In the past couple of years, public sector banks incurred combined net losses of over Rs 19,529 crore, even as the government capital infusion during these two years, at Rs 47,915 crore, was the highest in the last decade, according to data sourced from the finance ministry and stock exchanges.
Government infuses capital into PSU banks to support credit expansion and to help them tide over losses resulting from provisions that are to be made for non-performing assets (NPAs). Banks profits deteriorated sharply in the last two years as NPAs spiked and the RBI mandated asset quality review forced them to make higher disclosures of non-performing loans. State-owned banks earned the highest combined net profit of Rs 45,849 crore in 2012-13, in the year when the government infused a total of Rs 12,517 crore in the PSU banks. However, in 2015-16, when the government put in a record Rs 25,000 crore, the banks suffered the highest ever combined losses of Rs 20,003 crore.
While in any normal business higher profits are expected to accrue from greater allocation of capital, the data shows that PSU banks’ profits faltered even as they received large doses of capital — mainly due to rising NPAs requiring banks to set aside a portion of their profits towards provisions. The Gross NPA of banks has risen to 9.6 per cent in March 2017 from 9.2 per cent in September 2016, as per the RBI data. As against a net profit of Rs 36,264 crore in 2009-10, when the capital infusion was about Rs 1,200 crore, the data of 2016-17 shows a net profit of Rs 474 crore when the capital allocation Rs 22,915 crore.
To put the PSU banks’ house in order, the government has taken a series of measures in last 2-3 years including asking banks to agree to operating performance norms for getting capital, amending the loan recovery laws, merging associate banks with the parent State Bank of India, among others. Last year, the government enacted the Insolvency and Bankruptcy Code, and empowered the RBI this year to issue directions to banks to take defaulter companies to the National Companies Law Tribunal for initiating insolvency resolution.
In order to conserve capital allocation and to make banks efficient, the finance ministry has started signing memorandum of understanding (MoU) linking capital infusion into banks to operating performance. These agreements require banks agree to certain business turnaround initiatives, reduction in NPAs, generation of adequate return on assets, among others. Banks not meeting the performance conditions will have to shrink the size of their balance sheet and shut not-profitable branches.
Rising capital needs
While these measures are expected to reduce the pressure on the government of providing capital to the banks, their capital is likely to erode sharply on account of initiation of corporate insolvency resolution for large defaulters. Experts argue that state-owned banks will require much higher capital than estimated by the government, which is already reassessing its estimates.
In 2015, the Centre launched the Indradhanush plan of banks reforms to infuse Rs 70,000 crore into public banks over a four-year period. The government that estimated that public banks would require about Rs 1.8 lakh crore of capital by 2019. In the current financial year, the Centre has planned to put in Rs 10,000 crore into public banks.
In a report last month on the 11 public sector banks that it rates, rating agency Moody’s said that these banks will require external equity capital of about Rs 70,000 crore to Rs 95,000 crore, which is much higher than the remaining Rs 20,000 crore budgeted by the government towards capital infusion until March 2019.
The initiation of the corporate insolvency resolution the process is expected to inflict more pain on the banks as resolution is unlikely to be possible without lenders’ taking large haircuts on the loan values. As per an analysis by rating agency Crisil, banks are likely to take a haircut of 60 per cent, worth Rs 2.40 lakh crore, to settle 50 large stressed assets with debt of Rs 4 lakh crore. These 50 companies are from the metals (30 per cent of total debt), construction (25 per cent) and power (15 per cent) sectors, and account for half of the Rs 8 lakh crore NPAs in the banking system as on March 31, 2017.
The RBI recently directed banks to refer 12 large NPA cases — including Jyoti Structures, Bhushan Steel, Monnet Ispat and Electrosteel Steels, Amtek Auto and Era Infra Engineering among others — for resolution under the Insolvency and Bankruptcy Code. The 12 cases account for a combined debt of around Rs 2.5 lakh crore.
Since banks have provisioned for only 40 per cent of the exposure to the top 50 companies, such large haircuts would lead to erosion in their reserves. This would also necessitate a reassessment of the capital needs of the banks by the government and the RBI.
A senior finance ministry official said the RBI and the government are aware of the fact that the ongoing bad loan resolution will increase capital requirements of the banks. “We are already having discussions internally (within the government) to reassess the capital requirements of the banks. Resolution of NPAs is not possible without haircuts but we should not focus entirely the haircuts per se, and rather see merit in the process that has been initiated to clean up banks balance sheets,” the official said.