• HDFC securities
• 07 Jun 2018
• Knowledge Centre

The Finance Ministry has begun the procedure of determining the quantum of capital to be infused into public sector banks (PSBs) in FY19, as a part of the second round of recapitalization. The October 2017 Rs. 2.11 lakh crores recapitalization plan was devised by the Government to help PSBs in their struggle to overcome the many problems they are currently facing.

 

Weak Numbers

 

PSBs have not reflected healthy numbers in the last quarter’s results. There is a possibility that the worst is not over yet. This is owing to the fact that some PSBs have large exposures to Telecom and Power companies, where slippages would be visible only in the coming quarters.

 

Majority of the losses in PSBs in Q4 FY18 have stemmed from exposures that turned bad during the quarter, for which lenders were required to make provisions. In February 2018, the Reserve Bank of India (RBI) revised rules for the classification of stressed assets. According to these new norms, banks should classify the borrower as a defaulter if there is a one-day delay in the repayment of interest money. RBI has asked lenders to exercise options to revive the company within 180 days of the default.

 

Core business hit

 

PSBs’ core performance continues to remain weak. Subdued business growth and interest reversal owing to an increase in NPA (non-performing asset) recognition have resulted in increased pressure on net interest income.

 

These banks were already coping with issues brought about by haircuts on loans on the resolution, the early recall of Tier-I bonds, and losses on bond portfolios when the Punjab National Bank (PNB) debacle – the largest-ever fraud in Indian banking history – reared its ugly head. Despite having approvals and plans in place, there were steep dips in the banks’ share prices, and PSBs are unable to raise capital after the scam.

 

Moreover, recent quarterly results have further dampened any hopes of an early revival in the core business. The rise in yields on government securities resulted in substantially lower treasury gains, and core performance weakened with every passing quarter. In addition to that, the much-talked-about capital infusion by the Government seems inadequate at this juncture.

 

Privatisation of Public Sector Banks

 

The idea of privatizing PSBs has been met with differing views across the board. While industry body Assocham and some industrialists have pitched for bank privatization, it has faced resistance from other quarters on the basis that it would not be a wise move.

 

While as of now, the focus is on the poor performance of PSBs, it is important to remember that there were a few private banks which were severely impacted by poor lending decisions. This can be seen in the fact that since 1969, more than 35 private banks have stopped operations or merged with other banks, owing to inefficiency and poor management.

 

The Government has set up the Insolvency and Bankruptcy Code in order to resolve NPA issues last year. This has vested banks with the power to trail wilful defaulters and recover outstanding loans. It has also resulted in a change in the behavior of defaulters for the better.

 

Mr. Deepak Jasani, Head of Retail Research, HDFC Securities Ltd. summarized the situation. “For long-term investment, we need consolidation, changes in governance, stricter employee accountability at all levels, better risk management practices and a better compensation structure before investors can consider PSU banks for investment over the medium term,” he said.