Reserve Bank of India deputy governor Viral Acharya today pushed for “decisive and adequate recapitalization” of public sector banks to improve their financial health while expressing conceern over “glacial” pace of restoring public lenders to health.
“Given the correctly recognized scale of NPAs in the books of public sector banks and the lower internal capital augmentation, given their tepid, now almost moribund, credit growth, substantial additional capital infusion is almost surely required,” he said while delivering a memorial lecture at the Indian Institute of Banking and Finance on Thursday.
Even if banks raise capital from other avenues such as sale of non-core assets, share sale, and even divestments by the government, they would still be in the need of fund infusion, he felt.
The capital requirement of state-owned banks are more than that outlined under the so-called Indradanush plan. Announced in 2015, Indradhanush had budgeted Rs20,000 crore in total towards recapitalisation over this fiscal and next. But according to a Moody’s estimate, 11 big state-owned banks alone will require additional capital of Rs70,000-95,000 crore.
The central bank has taken many steps, for stressed asset resolution from setting up a database of large ticket loan exposure, nudging banks to recognised bad assets through a review, till the recent development where it asked banks to initiate proceedings against 12 large borrowers under Insolvency & Bankruptcy Code (IBC). It also followed with a second list, where banks have to come-up with a resolution latest by 13 December.
Acharya said the RBI hopes that banks utilise the IBC extensively and file for insolvency proceedings on their own without awaiting regulatory directions.
“We have created a due process for stressed assets to resolve but there is no concrete plan in place for public sector bank balance-sheets; how will they withstand the losses during resolution and yet have enough capital buffers to intermediate well the huge proportion of economy’s savings that they receive as deposits; can we end the Indian story differently from that of Japan and Europe?,” he said. PSU banks have a lion’s share in the stressed loan of the banking system, which has ballooned to around Rs 10 trillion.
According to Acharya the recent slowdown in loan growth is the real culprit.
“The resulting weak loan supply, and the low efficiency of financial intermediation, have created significant headwinds for economic activity,” he said.
The banking system’s loan growth has fallen substantially from over 20% in March 2011 to around 5% currently. The fall is substantial in case of PSU banks compared to their private sector peers.
The government has drawn an alternative mechanism on bank recapitalisation, such as stake divestment through exchange-traded funds and initiation of bank mergers, which could provide an opportunity to strengthen balance sheets and enable the bigger merged lenders to raise capital at better market valuations.
“All of this is good in principle. There are several options on the table and they would have to work together to address various constraints. What worries me however is the glacial pace at which all this is happening,” he remarked.
Acharya raised several questions such as whether a feasible recapitalisation plan can be announced publicly to restore investors’ confidence. He also came down heavily on banks’s management asking why they are not tapping market for capital when plentiful liquidity is chasing stock markets.
“What are the bank chairmen waiting for, the elusive improvement in market-to-book which will happen only with a better capital structure and could get impaired by further growth shocks to the economy in the meantime?,” he questioned.