Recapitalisation funds to take a while before accelerating credit growth

Illustration: Ajay Mohanty
North Block’s infusion of an additional Rs 48,239 crore in state-run banks last week brought the curtains down on a 2-year recapitalisation plan set in motion in October 2017; it adds up to a tidy Rs 1.96 trillion. You have fuel in the tanks for sure, but is it a journey towards a mirage?

At the first glance, it may appear the credit pipeline will unclog as a few banks under the prompt corrective action (PCA) framework breathe easy — they collectively account for nearly 20 per cent of the systemic credit. But’s what’s more likely to happen is that a large portion of the infusion will come to nestle under the provisioning head for dud loans. And by the end of the next fiscal, the leeway given on provisioning on loans to micro, small and medium enterprises (MSME) for a year will be reversed and can trip the credit profiles of banks all over again. What’s also not been pencilled in is that come April 2019, the Indian Accounting Standard (IndAS) will go live for banks (it had been deferred by a year) and additional capital calls will be in order due to early-loss provisioning norms.

While a parallel exercise for the IndAS framework is on, the Reserve Bank of India (RBI) is yet to firm up the guidelines. And two corner-room denizens at state-run banks were categorical the system is not geared for IndAS, and say off-record: “Meeting Basel III norms for capital is in itself a difficult task”, and “there’s a good chance the rollout will be postponed. Banks have made huge provisions for non-performing assets (NPAs) over the past few years and a shift to the early-loss provision concept will only add to the pressure.”

Few will admit it’s going to turn to be a case of being all decked up and going nowhere in particular, but you can infer though. 

Whistling in the dark

Says P V Bharathi, Corporation Bank’s managing director and chief executive officer: “The recap funds will go towards provisioning and bring down the net NPAs below six per cent by end-FY19 from over 11 per cent in December.” Adds S S Mallikarjuna Rao, Allahabad Bank’s managing director and chief executive officer: “We will break-even in the June 2019 quarter, and present the results to the RBI for review of the PCA.” 

“After fund infusion from the government, our provision coverage ratio will increase as we need to provide for the ageing of NPAs. Once the bank comes out of PCA, we will be cautious in our approach and limiting our exposure to the corporate sector, and focus on the retail sector,” said a senior official of UCO Bank; its provisioning coverage ratio (PCR) stood at 69.5 per cent at end-December 2018.

But what’s not clear is by when banks under the PCA can walk out of it. In December last year, Karthik Srinivasan, group head–financial sector ratings at ICRA was ominous: “Even in a scenario, whereby these banks are able to raise sufficient capital, make sufficient provisions, reduce net NPAs below the PCA threshold of 6 per cent and improve capital ratios above the regulatory level, they will have had two consecutive years of losses — FY19 and FY18. Hence, based on existing PCA regulations, these banks can exit the PCA based only on their FY20 performance, during FY21.”  

What’s unsaid is it’s entirely possible that another round of capital infusion may well be warranted down the round when the results of the annual financial inspection (AFI) and risk-based supervision (RBS) by Mint Road for FY19 come in; and it will be some time before it is placed before the Board for Financial Supervision – so a quick exit out of the PCA and business-as-usual will have to wait for a while. An early indicator of what life will be once out of the PCA can be gleaned from the observation made by a senior UCO Bank official who wished to remain anonymous.

“We will limit exposure to the corporate sector and focus on retail. After fund infusion, the provision coverage ratio (PCR) will increase from the 69.5 per cent at end-December as we need to provide for the ageing of bad-loans,” he said. What’s being couched is growth capital available to banks, and exposure to risk-weighted assets will be limited. That while banks will have leeway to lend to areas currently off their radar, “it will be a tightrope walk,” as the official puts it.

It’s more of the same even at banks not under PCA, says Rajkiran Rai G, managing director and chief executive at Union Bank of India, which has a PCR of 58 per cent. “How much of capital would be used for provision will depend on the recoveries from accounts like Essar Steel. Plus, we have also put other stressed assets on sale… some portion of capital will be used for growth, and the focus will be on retail, agriculture and MSMEs.” 

Up in the air 

The worry, according to Moody’s analyst Alka Anbarasu, is the slow progress in the resolution of legacy bad loans and the need to build up provisions against those assets that hinder a faster turnaround. 

“New NPAs could increase more than we expect, especially in the agriculture and MSMEs. In such an event, capital deficiencies will be larger than our baseline assumption and will require more support from the government,” she observes. 

You also have a few unanswered questions. No capital has been allocated to the merging banks — Bank of Baroda, Dena Bank and Vijaya Bank as on date — it can’t be ruled out that the AFI and RBS for FY19 will not throw up surprises.

And where is the capital infusion to come from? Says Madan Sabnavis chief economist at CARE Ratings: “No provision for recapitalisation was made in the FY20 Interim Budget. It’s is not clear if it will happen this year or in FY20. It’s to be seen as to where the funds will be allocated from. It could be from the interim dividend (the Rs 28,000 crore that RBI will pay the government) or be provided for through RBI reserves where a decision will be taken next month.” 

So, where are we now? It’s worth recalling Mark Twain: “The trouble ain't that there are too many fools, but that the lightning ain’t distributed right.”

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