State run banks need a major overhaul

Mon, 10 Mar Pre-Open

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Banking stocks have seen a good amount of volatility in the recent past. The key concern surrounding the sector is the rising default rates or the gross non-performing asset (NPAs) levels. And as per rating agency ICRA, the amount of bad loans in the system is likely to rise given the slowdown in the country. As per the agency, gross NPAs are likely to rise to levels of 4.2 to 4.4% by the end of the year. The same figure as of December stood at 4.1%. NPA levels of public sector banks are expected to rise to 4.8 to 5% of total loans in the system.

The absolute amount of bad loans - for the 40 listed banks - stood at Rs 2.43 trillion rupees as of 2013 end. This figure is higher by a massive 36% on a year on year basis.

To meet the Basel-III norms, the rising NPA levels would essentially mean more capital infusion in the equity capital of the banks, which would become a challenge for the government. As per the report, this is a big concern for the Indian banks, as the government has been infusing bare minimum capital into the state-run banks.

This is something that would impact the growth of the banks. However what is more worrying is a recent article by the Business Standard, which discussed about how the many a times NPA ratios do not include heavy debts of some highly indebted corporate groups. And that in many cases, the tools of restructuring are being misused to manipulate the NPAs! Despite operating in the same economy, the poor performance of public sector banks versus the private sector banks clearly indicates that something is wrong with the former's procedures, policies and the management.

It is in fact, such systems and procedures that mark the stark differences between public and private sector banks; which is reflected in the valuations of the two set of banks. We believe it is high time that the government, banks and policymakers give a serious thought to bringing some positive changes in the way public sector banks are run. This is because no economy can be strong unless it enjoys the support of a strong and healthy banking system.

As reported in an article in the Hindu Business Line, the author discussed why the recent United Bank episode should not be treated as a one-off case. And that measures such are narrow banking (a concept in which a bank places its funds in risk-free assets with maturity period matching its liability maturity profile; this would reduce the issue of asset liability mismatch, and overtime improve the quality of assets) should be implemented on the poor performing banks. He also discussed the idea of defaulting banks - which require recapitalization - not being allowed to grow and if the regulatory need be, the government should reinvest the dividends back into such banks. This is as opposed to it not investing additional funds into banks, which could possibly lead to a weakening public sector bank system.