The Deteriorating Scenario of PSU Banks

Wed, 21 Sep Pre-Open

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In a recent interview, Union Finance Minister, Mr Arun Jaitley stated that the recapitalization of the banks will shore up funding requirements of the industries.

The recapitalization part only goes on to suggest the bad state of banks in the economy. Recently, Reserve Bank of India (RBI) released its biannual Financial Stability Report. The key-takeaway was that the condition of the banks especially public sector banks (PSBs) has deteriorated. The gross non-performing assets (GNPA) as a percentage of total advances rose to 7.6% in March 2016 from 5.1% in September 2015. The GNPAs were the highest as witnessed in twelve years. Further, RBI stated that this ratio could further deteriorate to 9.3% by March 2017 under a severe stress scenario.

To add to the woes, the credit growth of Indian banks has slowed down especially to the corporate sector. The credit growth of Indian banks slowed to 8.8% in March 2016 from 9.4% in September 2015. This is owing to their weak balance sheet. They are not lending to corporates for fear of adding to bad assets.

However, the same cannot be said for the retail loans or what RBI calls personal loans. These include home loans, vehicle loans, credit card outstanding, consumer durable loans, loans against shares, bonds and fixed deposits, and what we call personal loans. The retail loans of banks have grown by 19.7% in the last one year.

Personal loans are easy to recover as compared to the corporate loans. Hence to avoid a further asset deterioration scenario, the banks are increasingly reducing their exposure to the corporate sector.

The government has always in the past come to the rescue of the public sector banks by recapitalizing it. The recapitalization takes place with the hard earned money of the taxpayers. This year too, the government plans to recapitalize the banks to the tune of Rs 250 billion.

This theory to perpetually bailout the public sector banks have not been productive. These public sector banks have continued to lend to already leveraged companies or stressed sectors, without proper credit appraisal policy in place. These banks know that the government will ultimately come to its rescue, which have in-turn led them to lending to businesses which lack conviction and fundamentals.

How can we resolve this never ending issue? The simple solution is privatization of the public sector banks. There is no rationale behind the government running 27 banks. Once, the banks are professionally managed, there would automatically be a reduction in the stressed asset scenario. However, this is easier said than done.

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