The government has signed the first memorandum of understanding (MoU) linking capital infusion into banks to operating performance with the Union Bank of India for the current financial year. The finance ministry is in discussions with other state-owned lenders including Uco Bank, United Bank of India, Allahabad Bank, Andhra Bank among others to sign similar MoUs, government sources said. These agreements require banks agree to certain business turnaround initiatives, reduce non-performing assets (NPAs), generate adequate return on assets and capital employed among others.
Banks not meeting the performance conditions would be required to shrink the size of their balance sheet and shut not-profitable branches. This is expected to reduce the pressure on the government of providing capital to the banks. In 2015, the Centre launched the Indradhanush programme, to infuse Rs 70,000 crore into public banks over a four-year period. The government estimates that public banks would require about Rs 1.8 lakh crore of capital by 2019. This year Centre will put in Rs 10,000 crore into public banks.
A finance ministry official said these MoUs will be signed with the relatively weaker banks to ensure that they adhere to performance parameters. While shrinking the size of weak banks, the government intends to consolidate the relatively strong banks through mergers. “These agreements are being signed among the government, a bank’s management and their unions, setting up the conditions on reducing NPAs, improving recoveries and enhancing profitability,” the official said.
Union Bank of India’s gross NPAs surged to 11.17 per cent by March-end 2017, from 8.70 per cent by March-end 2016. Its net NPAs rose to 6.57 per cent from 5.25 per cent. The bank’s average return on assets fell to 0.13 per cent by March-end 2017 from 0.34 per cent by March-end 2016. The bank’s net profit fell sharply to Rs 566.75 crore in 2016-17 from Rs 1342.89 crore in 2015-16.
Apart from shutting non-profitable domestic and international branches, the government wants such banks to exit from non-core activities. In a press briefing earlier this month on the ordinance empowering the Reserve Bank to speed up the NPA resolution process, Finance Minister Arun Jaitley indicated that the weak banks will have to sell assets, reduce overheads and shut loss-making branches.
“We are also planning the process that when the MoUs are signed, with the public sector banks which seek capitalisation, that there would be some specific provision in those MoUs also, which would be incorporated. This would relate to immediate cash release initiatives, such as sale of assets, closure of non-profitable branches, reduction of overheads, business turnaround initiatives, such as strengthening of the credit appraisal process under active NPA management and several others,” Jaitley had said.
The government is asking banks to sign these agreements as part of the overall plan to revive the health of the state-owned banks battling high NPAs. Bad debts have risen sharply in the PSU banks, while private banks registered somewhat lower jump in NPAs in the nine months in 2016-17.
Public sector banks NPAs surged by over Rs 1 lakh crore during April-December period of 2016-17. PSU banks gross NPAs rose to Rs 6.06 lakh crore by December 31, 2016, from Rs 5.02 lakh crore during the entire year of 2015-16.
For the private sector banks, gross NPAs grew to Rs 70,321 crore by December 31, 2016, from Rs 48,380 crore as on March 31, 2016. In the fourth quarter ending March, the addition to NPAs has slowed down but banks wrote off a larger quantum of bad loans. Analysts believe that such high level of NPAs would require the government to infuse much larger doses of capital than originally planned.
In its report analysing three-years of the current government released on Monday, rating agency Crisil said that capital infusion planned by the government in PSU banks is inadequate, given the high capital requirement to meet Basel-III norms, and the relentless rise in gross NPAs.
Crisil said it expects loans slippages to be lower in fiscal 2018 compared with the previous two fiscals, but gross NPAs are nevertheless expected to remain at elevated levels and touch 10.6 per cent of advances by March 31, 2018, due to slower recoveries.
“Reduction in NPAs largely supported by high write-offs so far. In fiscal 2016 and for the nine months ended December 31, 2016, the share of write-offs in overall reductions for public sector banks increased to 45 per cent against 37 per cent average in the previous 5 years,” it said.
While linking capital infusion to performance, the government is also asking banks to prepare for raising resources from the market. “There are constraints to the extent to which government can provide funds, but capital is required for growth,” the official said.
Earlier this month, country’s largest lender State Bank of India initiated steps to raise funds from capital markets in the current fiscal. While the bank did not specify the amount to be raised, industry sources said it could be up to Rs 15,000 crore.
SBI has sought applications from merchant bankers by May 22 for managing the issue. The bank has already taken the board’s approval for raising up to Rs 15,000 crore through various means in the current fiscal. The government currently holds 62.22 per cent stake in the bank as of March 2017.