10 years of banking sector: Pvt sector gains at cost of public sector banks

Soon after the credit crisis erupted in 2008-09, there was a sigh of relief that the Indian banking system was safe, thanks to the regulator debarring lenders from investing in toxic collateralised debt obligations (CDOs) or its derivative credit-default swaps (CDS). Indian companies seemed to be healthy, and a consensus was building up that India was decoupled from the global crisis. The jubilation was short-lived.


After 2008 meltdown


It quickly became apparent that Indian companies, in their quest for aggressive expansion, had bought companies overseas at steep premiums, but because of the slump in the global demand after the credit crisis, the assets became duds.


A fall in exports in the developed world posed its own set of problems. Since then, the installed capacity never got fully utilised for these companies. The balance sheet started bloating and the companies started defaulted on loans to domestic banks, putting enormous stress on the balance sheets of the lenders. This is commonly known as twin balance-sheet stress.


About a decade from the credit crisis, the twin balance-sheet stress has emerged as the greatest threat to the banking system. On top of that, allocations of coal blocks between 2005 and 2011 were scrapped by the Supreme Court, putting most power-producing firms in dire straits.


Bad debts of state-owned banks ballooned because they aggressively gave loans for infrastructure projects, but the companies themselves are in deep waters with most promoters in danger of losing their firms.


The NPA crisis


The RBI data shows that at the end of March 2008, gross non-performing assets (NPAs) as percentage of advances were at 2.26 per cent. This zoomed to 9.32 per cent by the end of March 2017. If we add the stressed loans, not yet NPAs but have been restructured before, the ratio may rise to 14 per cent of the advances. Most of these numbers have come to the forefront because the RBI forced banks to disclose their stress, while subsequent changes in laws have made concealing bad debts in the garb of restructuring impossible.


The RBI has now made it mandatory that all banks must invoke a resolution plan for large companies within 180 days of their loans becoming NPAs. At the end of March last year, while public sector banks’ gross NPA ratio stood at 12.95 per cent, the private sector reported 4.05 per cent of their loans as bad debts and for foreign banks, the gross NPA ratio was at 3.96 per cent, the RBI data showed. NPAs in absolute terms for all banks were at nearly Rs 8 trillion by the end of 2016-17.


According to Ashish Gupta of Credit Suisse, 55 per cent of the power and telecom debt is with companies having an interest coverage ratio of less than 1. But the recognition of the stress is low, with only


10-15 per cent classified as NPAs and 25-35 per cent of the debt still in the non-NPA stress bucket.


Banks are now dragging large defaulters to court under the Insolvency and Bankruptcy Code. Analysts say banks would have to take a haircut of at least 40 per cent and upward of 75 per cent on the nearly Rs 2 trillion of assets undergoing bankruptcy proceedings. The government is on course towards capitalising banks just to the extent of meeting their provisioning challenges. On top of this has come the Rs 130-billion fraud at Punjab National Bank.


Share of banking


Over the years, public sector banks have slowly given away their market share to their private sector peers. While the government-owned banks still command 68.1 per cent of the advances, at the end of fiscal 2007 their share was 72.6 per cent.


In the same period, the private banks have improved their share to 27.8 per cent from 21.5 per cent, while the share of the foreign banks has shrunk to 4 per cent from 5.9 per cent earlier. Private sector players such as HDFC Bank, Kotak Mahindra Bank, IndusInd Bank, and Yes Bank have seen their market capitalisation growing at high double digits on a 10-year compounded annual basis. In the same period, State Bank of India has grown only about 8 per cent, while for some such as Indian Overseas Bank, market cap has fallen 2.7 per cent.


Non-banking finance companies (NBFC) have also made rapid strides. “The share of NBFCs in total credit extended by banks and NBFCs together increased from 9.5 per cent in March 2008 to 15.5 per cent in March 2017,” observed the RBI’s Trend and Progress Report. However, from 2.8 per cent in 2011-12, NPAs now stand at 4.8 per cent of the advances in the NBFC sector.


The greatest change was the number of new banks that were introduced in the system.


Since April 2014, the RBI has granted 23 banking licences.


The introduction of new banks came a decade after the RBI gave the licence to Kotak Mahindra Bank and Yes Bank Ltd. In that sense, within 10 years, there was a jump in the number of banks in India.


This period also saw a contraction in established banks through mergers. State Bank of India merged its remaining five associate banks and Bharatiya Mahila Bank (which started in 2013) with itself on April 1 last year.


The plan now is “on tap” licensing, which means anybody can now apply for a banking licence, and, based on the fit and proper criteria of the central bank, a licence could be given.


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