India’s cash-starved government has decided to capitalize public sector banks (PSBs) only if the lenders meet certain strict criteria.
The finance ministry wants these banks to come with a five-year road map keeping in mind their capital requirement by 2015-16. They are required to submit their plans for total business, loans and position of non-performing assets (NPAs), or bad debts, among others.
It also wants to know from the banks how they plan to improve on financial parameters such as cost to income, return on asset, return on equity, and leverage technology to grow profitability and productivity per employee.
The ministry, representing the government, the majority owner of PSBs, recently sent two separate notes to these banks, but not all of them have received the note on improving financial parameters yet. Those banks that have a low capital adequacy ratio have received both the notes and a few of them said the criteria are steep.
These are in addition to the statement of intent that the ministry asks from all banks seeking their plans to increase deposits and advances at the beginning of every fiscal year. Also, the criteria laid down in the second letter, which have reached only those whose capital base is low, are different for different banks.
The letters have been sent keeping in mind Basel-III norms, an international standard of accounting that puts a higher capital requirement for banks. The norms kick in from April 2013 in phases.
Minister of state for finance Namo Narain Meena told reporters last week that finance minister Pranab Mukherjee has approved Rs. 14,000 crore this year for bank recapitalization. PSBs had asked for Rs. 18,000 crore of capital this fiscal year and another Rs. 19,000 crore in 2012-13.
State Bank of India (SBI) chairman Pratip Chaudhuri recently said Mukherjee has committed Rs. 3,000-4,000 crore capital to the bank, which had asked for at least Rs. 10,000 crore.
Ganeshram Jayaraman, a banking analyst at Spark Capital Advisors (India) Pvt. Ltd, said the implementation of Basel-III norms has made the government plan for long-term capital requirements of banks. The capital requirement will vary for each bank, depending on their respective growth trajectory of capital adequacy, profitability and asset quality.
Global credit rating agency Moody’s Investor Service on Wednesday downgraded the Indian banking sector on capital concerns. In October, it had downgraded the financial strength rating of SBI on capital and bad debt concerns.
There is no agreement on how much capital the banking industry would need to meet the Basel-III norms. The estimates by various agencies show the requirement can be as high as Rs. 1 trillion for 27 PSBs, including six subsidiaries of SBI. The government is the majority holder of PSBs, and being the owner, it wants to know what the capital requirement will be for the next five years, said Diwakar Gupta, managing director and chief financial officer, SBI.
An analysis by brokerage Ambit Capital shows that state-owned banks largely have not used their capital efficiently. “There are some banks that have delivered return on assets (RoA) below 1% for a sustained period of time, and there are others that have consistently delivered a return on assets above 1%. This implies that some banks do not utilise their capital efficiently enough and it is only fair that the ministry will ask them to be more efficient in capital utilization,” said Krishnan A.S.V., an analyst at Ambit Capital.
Ambit sees Punjab National Bank consistently kept its RoA above 1%, while SBI, the nation’s largest lender, slipping on RoA by 0.3% to 0.7% between fiscal 2006 to fiscal 2011.
While the ministry’s plan will introduce a lot of internal discipline among banks, an executive director of a state-owned bank said the government needs to compromise on its dividend policies if they want the banks to perform well.
One example of a strict set of rules is that Chennai-based Indian Overseas Bank, which asked for Rs. 1,400 crore as capital from the government, has been asked to improve its Casa (current account-savings account ratio) to 40% from 25% now. On the NPAs front, the ministry said bad loans over two years should not be more than 10% of the total NPA book.
M. Narendra, chairman and managing director of Indian Overseas Bank, said this is a step taken by the government to make make PSBs more profitable, productive and to use technology optimally so as to become nimble-footed.
“This is an amplification from the government for banks to set aggressive targets and become more lean,” said Rakesh Sethi, executive director, Punjab National Bank.
“Instead of putting the money in a black pit, the finance ministry wants to know what the banks are doing with the capital,” said the chairman of a large public sector bank. “But in doing so, they have put criterions that are very steep to achieve. However, it’s only in deliberation stage and I am sure they will dilute the conditions quite a bit.” The top executive declined to be named.
“A chairman should be given a long stint in order to offer the bank’s employees stability in vision and the strategies that the bank is likely to follow,” said Krishnan of Ambit. “Also, the commitment needs to be understood to have been underwritten by the bank, irrespective of a change of guard midstream”
S. Bridget Leena & Anup Roy
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