The government has directed small public sector banks (PSBs) to cut their corporate loan exposure to 25 per cent of their risk-weighted assets over the medium term and focus more on retail lending. This strategy is being followed to shrink the size of relatively weaker banks over the next two years. According to the latest figures, the corporate loan exposure, for a number of PSBs, is around 50 per cent or higher, while retail exposure is around 15 per cent.
In a communication to chairpersons and CEOs of PSBs, detailing the government’s reforms agenda, Banking Secretary Rajiv Kumar has said smaller PSBs must cut their corporate loan exposure by a minimum of 15 per cent by March 2019. Banks have been asked to ensure board-approved policies in place for achieving the loan exposure mix, for which they can pursue asset swaps and sales with the larger banks. Retail loans such as housing, vehicle and car loans typically exhibit low level of non-performing assets, while corporate loans have been mainly responsible for the build-up of stressed assets in the banking system.
“It is incumbent on PSBs that the trust reposed by the government translates into economic returns for the country. Holistic and wide ranging reforms need to therefore take place alongside, so that this capital is effectively utilised towards faster economic growth,” Kumar said in his letter to heads of PSBs, detailing the reforms roadmap — Enhanced Access & Service Excellence (EASE) announced Wednesday.
Following the announcement of capital infusion, it has emerged that the government intends to grow larger banks that focus on corporate lending while weak banks are cut to size and geared towards retail clients. In the roadmap towards reaching the 25 per cent corporate loan exposure mark, the government has asked smaller banks to first cut their corporate loan exposure to either below 40 per cent by March 2019 or by at least 15 per cent from the September 2017 level. The government hopes to see some smaller PSBs turn into national retail banks and regional retail banks, limiting the corporate loans business primarily to large banks such as State Bank of India, Punjab National Bank and Bank of Baroda.
The corporate loan (including MSME loans) exposure of Dena Bank, for instance, is 50.30 per cent of total advances, while its retail exposure is 16.78 per cent at the end of the July-September quarter. Indian Overseas Bank’s corporate loan exposure is 47.46 per cent and retail exposure is 13.36 per cent of total advances at the end of the July-September quarter. On the other hand, gross NPAs in State Bank of India’s retail portfolio was just 1.41 per cent while bad loan ratio for its corporate loans was at 19.71 last September-end.
Apart from reduction in corporate loan exposure, the government has asked banks to have board-approved policies on monetising their non-core assets, sale of vacant real estate and “exit from all strategic equity investment” in unrelated businesses. For instance, IDBI Bank, which will receive the highest capital infusion of Rs 10,610 crore, has sold its stake in SIDBI and CCIL for a total of about Rs 1,500 crore in the July-September quarter. The bank is continuing with this strategy to monetise its stake in non-core assets, a Finance Ministry official said. These measures are expected to bolster the weak banks’ capital adequacy, while reducing the pressure of recapitalisation on the exchequer in future years.
Sources said once the PSBs get into reasonable shape post recapitalisation, the government will pursue consolidation in the banking space. The measure directing PSBs to maintain a threshold of 10 per cent for participation in consortium loans will also ensure that only strong banks pursue corporate lending aggressively.
The government said the PSBs should have separate sets of officers involved in appraisal, monitoring and recovery of loans. Segregation of pre and post sanction of loans responsibilities has also been advised. The reforms roadmap also asks banks to appoint a Chief Risk Officer with requisite skills, and direct reporting lines to the MD & CEO/Risk Management Committee of the Board. The Ministry said banks must carry out stress tests semi-annually, focussing on concentration exposures at the borrower, group and sector levels.
The government has asked the bank boards to approve each bank’s plans to implement the PSB reforms agenda and monitor it quarterly. Alongside fund infusion, the government has announced a set of measures to keep close watch on the asset quality of the banks, including “specialised monitoring” by agencies for corporate loans of more than Rs 250 crore.
The Ministry Wednesday said that eleven weak banks will be given a total of Rs 52,311 crore to maintain minimum capital requirement even as nine strong banks will get Rs 35,828 crore to pursue growth. The government expects capital infusion to result in additional credit deployment of Rs 5 lakh crore. A total of around Rs 1 lakh crore will be infused in the PSBs by March-end, which comprise Rs 80,000 crore via recapitalisation bonds, Rs 8,139 crore through gross budgetary support and Rs 10,312 crore of funds raised from the market.