The government must play the role of a responsible sponsor if it wants banks to support growth. The message, from the banking regulator, is clear — chip in with capital, or else banks will not live up to the expectations of New Delhi and India Inc.
The RBI’s Financial Stability Report reminds the majority stakeholders that banks have turned risk averse and would perhaps remain so and focus on repairing their balance sheets if capital is not forthcoming. Their ability to meet loan demand, as and when it picks up, would be constrained by their low levels of capital.
The bi-annual report highlights the performance of banks and gives insights on the extent to which Indian banks are resilient to the stress in the system.
This isn’t the first time that the need for capital has been underscored. In the past, several rating agencies and analysts have come out with reports with estimates of fund infusion that banks would need to meet the Basel III norms by 2019.
Tuesday’s report gains significance as it captures the impact of asset quality review (AQR) — an exercise undertaken by the RBI to prevent banks from masking potential bad loans. As a direct fallout of AQR, gross bad loans rose 79.7% in six months ended March 2016. State-owned banks’ capital adequacy ratio plunged and cumulative losses touched Rs 17,995 crore for 2015-16. Despite this, the government is yet to promise more capital than Rs 70,000 crore it had allocated for four years.
A bank’s ability to lend is directly linked to the capital it owns since capital acts as the buffer when borrowers fail to repay loans. A bank can boost capital either by ploughing back profits, raise funds from the market or its promoters. The first two options appear remote with banks reporting highest-ever losses and their stocks taking a severe knock.
A precursor to ‘achhe din’ is a private investment which requires credit support from banks. Last year, the RBI had stepped in to support the government. It relaxed capital norms that helped banks shore up capital. In the past, Life Insurance Corporation — the largest government-owned insurer — bailed out the government by infusing capital in PSU banks.
Chances are RBI and LIC may be less generous this year. With Rs 25,000 crore of capital infusion budgeted for this year, it may help some of the banks to stay afloat, but it would not encourage them to step out and lend to back growth.
If the government, as the promoter, is unable to bring in money, it should divest its stake in banks and accept being a minority shareholder. This would not only enable banks to raise capital but also spare bankers from the glare of the dreaded CVC. The Centre has said it would lower stake in IDBI Bank but is yet to act on it. State-owned banks have 70% of the market share with a bag of bad loans that is 10 times more than that of private lenders. It’s time the government walks the talk to save and grow these crucial institutions it owns.
Source: Economic Times