Grappling with stress, PSBs need to build buffers to absorb shocks: Report

Public sector banks (PSBs) need to improve performance and work to build buffers against disproportionate operational risk losses, according to the Financial Stability Report (FSR).

State-owned banks have been grappling with stressed loans and limited capacity to absorb further rise in slippages expected due to prolonged economic slowdown.

In fact, the Reserve Bank of India’s (RBI’s) stress tests have projected a rise in gross non-performing assets of banks to 9.9 per cent by September 2020 from 9.3 per cent in September 2019.

According to the FSR, the regulator conducted macro stress tests for credit risks to assess the banking system’s resilience to macroeconomic shocks under baseline conditions. It assumed continuation of the current economic situation in the future.

Among the bank groups, under the baseline scenario, public sector banks’ gross non-performing asset (gross NPA) ratios may increase to 13.2 per cent by September 2020 from 12.7 per cent in September 2019.

Bad loans of private banks may rise to 4.2 per cent from 3.9 per cent. In case of foreign banks operating in India, gross NPAs may increase to 3.1 per cent from 2.9 per cent in September 2019, the FSR said.

The pace of economic growth decelerated to 4.5 per cent in the second quarter ended September 30, 2019. In the monetary policy review early December, the RBI revised its real GDP growth estimates for 2019-20 to 5.1 per cent from 6.1 per cent in the October policy. The economy is expected to grow at 5.9-6.3 per cent during the April-September 2020 period.

PSBs’ profitability ratios were muted due to weak credit growth as well as slow resolution of NPAs. The profitability ratios of private banks also declined whereas foreign banks showed better profitability.

PSBs’ weak return on equity (RoE) and return on asset (RoA) numbers compared to their private sector counterparts continue to come in the way of their ability to raise equity capital from the market at a decent rate.

Regarding buffers against anticipated risks, private banks’ provision grew at a faster rate as compared to those of PSBs, the report said.

Net NPA ratio declined to 3.7 per cent in September 2019 from just below four per cent in March 2019, reflecting increased provisioning. The provision coverage ratio (PCR) of all scheduled commercial banks or SCBs rose to 61.5 per cent in September 2019 from 60.5 per cent in March 2019, implying increased resilience of the banking sector.

Referring to the review of various sectors, it said the asset quality of agriculture and services sectors, as measured by their gross NPA ratios, deteriorated in September 2019 as compared to March 2019.

For various sectors, slippages during the period declined. Among the sub-sectors, slippage ratios of ‘textiles’, ‘rubber’ and ‘construction’ industries increased during the period.

Abhijit Banerjee's idea of privatisation won't end PSBs' NPA woes: Unions

Associations of employees and officers of public sector banks (PSBs) have expressed disagreement with Nobel laureate Abhijit Banerjee's view that the government should privatise PSBs to tackle the crisis in the sector, asserting that diluting the Centre's stake in PSBs is "no solution".

Instead, the unions said, ensuring "proper governance in the system" and "removing political interference" will address the problem of NPAs that has been weakening the financial health of the PSBs.

During his recent visit to India, Banerjee said there is need to bring down the stake of the government to below 50 per cent in PSBs so that decisions could be taken without the fear of Central Vigilance Commission (CVC).

"We do not know how privatisation of PSBs will tackle the crisis in the sector? The NPA problem is mainly due to economic slowdown, lack of governance in the system and political interference. Dilution of the Centre's stake is no solution," United Forum of Bank Unions' convenor (West Bengal) Siddhartha Khan told PTI.

Echoing Khan, All India Bank Officers' Confederation joint general secretary Sanjay Das said reducing the government's stake in PSBs to below 50 per cent to take the bankers out of CVC ambit is no panacea.

"It is a fact that bankers are often harassed in the default cases without addressing the root cause of the NPA issues, but the presence of CVC provides checks and balances in the system," Das said.

In August, the CVC constituted the Advisory Board for Banking Frauds headed by former Vigilance Commissioner T M Bhasin to examine bank fraud over Rs 50 crores and recommend action.

The banking system has been afflicted by the scourge of high NPAs for nearly five years, which has led to erosion of net worth and unfolding of scams in the sector, with the Punjab and Maharashtra Cooperative Bank (PMC) being the new addition.

"We have been advocating proper governance in the system and removal of political interference as these will address the problem of NPAs. Unfortunately, political parties who come to power derive political mileage through loan melas and loan waivers," Das said.

Khan, also working president of All India SBI Staff Federation, said, "If the government's stake is brought down to below 50 per cent in the PSBs, which will provide loans under PM Mudra Yojana or advances under the 59-minute loan scheme and many other programmes.

"The government controlled PSBs provide loans in these schemes, though we know a fraction of these loans may not be recovered. Had a proper governance system been in place, the banks would not face the NPA problem," he said.

"We do not know in what context Abhijit Banerjee had said that, but we are against dilution of government holding in the public sector banks. It will provide no solution to the NPA problems," Bank Employees Federation of India's Vice President Pradip Biswas told PTI.

Instead of accepting haircut or writing-off bad loans, the government should "initiate criminal proceedings against the wilful defaulters" to address the NPA problem in the banking sector, he added.

Sitharaman to meet PSB CEOs on Oct 14, discuss credit offtake, other issues

Finance Minister Nirmala Sitharaman will hold a review meeting with CEOs of public sector banks (PSBs) next week to discuss various issues, including progress on credit offtake.

The meeting, scheduled to be held on October 14, is expected to review fund flow to stressed NBFC and MSME (micro, small and medium enterprises) sectors, sources said.

Banks are expected to present a report card on partial credit guarantee scheme and fund raising from market to enhance their capital base.

The Centre in August issued guidelines on operationalising Rs 1 trillion partial guarantee scheme under which PSBs can purchase high-rated pooled assets of financially sound non-banking finance companies (NBFCs).

NBFCs, including housing finance companies (HFCs), came under stress following a series of defaults by the group companies of IL&FS in September last year.

Besides, the meeting will also assess the progress of first phase of outreach programme held across 250 districts across the country.

This will be the second meeting of Sitharaman with CEOs of PSU banks in less than a month.

The first phase of 'Loan Mela' for providing credit to agriculture, vehicle, home, MSME, education and personal categories ended on October 7.

During the annual performance review earlier this month, PSBs decided to undertake outreach exercise in 400 identified districts. Later, the private sector too expressed willingness to join the initiative.

The second phase will be held in 150 districts between October 21 and October 25, just before Diwali.

Additionally, the Centre will also review loan delivery through 'psbloansin59minutes' portal.

The platform has helped reduce turnaround time for loan processes in such a way that MSMEs can get an eligibility letter and in-principle approval in 59 minutes and can choose the bank of their choice.

After the approval letter is received, the loan is expected to be disbursed in 7-8 working days.

Touted as the country's largest online lending platform, the portal was launched by Prime Minister Narendra Modi in November 2018 with an aim to make credit access and banking for MSMEs transparent and hassle-free.

The portal sanctioned loans worth over Rs 35,000 crore in less than four months from its launch.

As on March 31, 2019, more than 50,706 proposals had got in-principle approval and 27,893 proposals had been sanctioned.

Banks form GM-level teams for merger ease, may hire advisory firms

Public sector banks (PSBs) named for merger by the government have formed teams at the level of general managers (GMs) to ease the process of integrating products and processes. Heads of the 10 PSBs on the merger list met in Mumbai on Wednesday to discuss initial plans.

The government plan was announced last Friday, to merge 10 PSBs into four. Punjab National Bank, Oriental Bank of Commerce, and United Bank of India will combine to form the nation's second-largest lender. Canara Bank and Syndicate Bank will merge; Union Bank of India will amalgamate with Andhra Bank and Corporation Bank; Indian Bank will merge with Allahabad Bank.

Rajkiran Rai, managing director and chief executive at Union Bank of India, said it was more of learning from Bank of Baroda’s experience in managing the merger of Vijaya Bank and Dena Bank with itself. State Bank of India also shared its takeaway from the integration of five associate banks.

Action plan

Integration of products, processes is priority

Senior-level professionals across banks are getting involved in areas like IT and human resources

Advisory firms may be hired for assistance

Best practices of various banks to be adopted

The meeting was anchored by the Union ministry of finance. The focus of the interaction was more on processes. There are various statutory and legal ones involved in a merger. More senior-level professionals across the banks are getting involved in merger work, in areas like information technology (IT) and human resources, said two senior executives.

“We do not want the feeling of large banks taking over control of small banks to dominate the process. Best practices of various banks will be adopted to get business benefit for an organisation, post merger. The priority is minimal disruption to business and customers,” said bankers.

Banks are also weighing the option of hiring experts for help in specialised areas. "Some of us may rope in advisory and consultancy outfits to assist. The areas could be IT system integration or cultural and human resource management issues," an official said.

While there are similar products offered by the banks to be merged, there are some overlapping and some unique products. The merger exercise would need to cautiously merge the products, keeping in mind technological support, said the head of a PSB who attended the meeting.

Documentation in this regard would be an important component, he said.

As a next step, the banks to be merged, it was suggested, should form joint committees on various verticals, under an apex committee to oversee the process. For example, different committees with representatives from all the banks to be merged to work on different areas like risk management, products, technology or policy. Anchored by an apex committee for the merger, which is to have representatives from all the banks in question.

Also, while branch rationalisation would be on the cards, no voluntary retirement schemes. For, PSBs were already going very slow on recruitment over recent years, according to the chief of one of these.