Shake-up time for public sector banks Buisness Line June 17th 2015

They need to raise their capital to meet future growth needs. Divestment must be looked at seriously

June 16, 2015:  

The issue of capitalisation of public sector banks has come back to the discussion board. The problem is not acute right now as PSBs are adequately capitalised, with all of them having a capital adequacy ratio of above 10 per cent, with 10 of them above 12 per cent.

The amount required to keep pace with growth is large, but at present demand for credit is low. But adhering to Basel III norms would put additional pressure on these banks. Further, as we are talking of GDP growth rate of over 8 per cent on a sustained basis, companies will have a problem raising funds if banks are not up to it, considering that the corporate debt market is still to evolve.

The question is how to infuse this capital in PSBs. PSBs account for around 75 per cent of deposits and credit. However, their share in equity capital is just 25 per cent, and reserves 60 per cent — which are two important components of tier 1 capital.

With banks making more provisions for the restructured assets, profits will be affected, thus impacting reserves. The usual routes for infusing capital are promoters putting in more money or additional funds being raised in the market through public issuances.

The control factor

But when it comes to PSBs, there is an ideological issue of the government retaining control. Being the majority owner of these banks, the onus is to ensure that these banks are well capitalised and able to meet the challenge right up to 2019 when we are fully Basel II compliant. The immediate option is to infuse capital through the Budget. In the last five years, including FY16, the amount provided through the Budget has been ₹54,447 crore. However, for the period FY12-FY13, an annual average of ₹13,172 crore was allocated, while for FY15 and FY16 it is ₹7,465 crore. Budgetary constraints have clearly put pressure on these numbers.

Given a capital adequacy ratio of roughly 10 per cent, a lower allocation would mean that the ability to generate risk-weighted assets of about ₹57,000-60,000 crore gets affected (difference between ₹13,172 crore and ₹7,465 crore). This will put future constraints on growth if not substituted by other sources of funds.

One way is to provide such funds to banks which meet certain performance parameters. The other school of thought is that banks which are not doing relatively well should be supported more through such infusions. Now, if the government has limited bandwidth to provide funds or is ideologically inclined to support only the better performing banks, then the logical conclusion is to either merge banks that have a shortfall or let them go to the equity market.

The current thinking is that the government will continue to hold majority stake. Who would like to buy a large stake in the bank either as a strategic partner or investor in a weak bank with the government as owner? Based on current market prices of 21 listed PSBs (excluding the SBI associates), the total amount that can be garnered while retaining the government stake at 51 per cent would be around ₹47,000 crore.

Labour issues

Divesting beyond 50 per cent is another solution, albeit a tough decision, but that would require tackling the issue of labour. Logically, full divestment is akin to selling to or merging with a private bank. But payscales and staff rationalisation are issues.

Curiously, PSBs have actually done very well on the staff front in the last 10 years. Total headcount increased by 11 per cent between 2004-05 and 2013-14. However, the increase was only in the officers’ category by 46.4 per cent while those for clerks and sub-staff declined by 4.3 per cent and 9.8 per cent respectively. The average cost of an employee has increased from ₹3.36 lakh to ₹9.07 lakh, which indicates that compensation too has been steadied to market standards.

This does indicate that tackling unions may not be the major hurdle provided appropriate steps like training, promotions, re-skilling, compensation are taken. In fact a strategic sale to a private investor can be thought of where there are safeguards for the staff, but autonomy for the new management.

To maintain status quo in ownership and structure, merging with other PSBs is an option. But this is a short-term solution, as ultimately the same balance sheet gets to reside in another bank’s balance sheet. The effort has to be on rationalisation of branches, infrastructure, staff, positions and designations.

The last option is to get the undercapitalised banks to function like narrow banks by investing in GSecs as their risk weighted assets would improve. This will hold for banks that have problems of both capital and NPAs as the present provisioning for restructured assets would put some additional burden on capital requirements.

PSBs have carried the cross for development all these years and have not changed focus to retail lending to protect their balance sheets. It is only proper that we move towards a workable solution.