The banking sector, in FY18, went through a lot—from mounting NPAs & the IBC coming into force to governance lapses and talk of privatising PSBs.
The banking sector has gone through another tumultuous year, having its ups and downs. The focus of both the government and the Reserve Bank of India (RBI) was to make the system robust and ensure it was on the right track. It was particularly challenging, as all solutions that appeared to have been found confronted new obstacles that made them look like mirages.
First, the NPA issue, which is at the top of the mind, appears to be still on an unknown road. It was hoped that the asset quality review process would have been completed by March 2017. But, these assets have been increasing every quarter, and while it is now hoped again that March 2018 would be the end of the tunnel, one cannot be really sure about it. The NPA ratio is close to the 10% mark, while the stressed asset ratio is above 12%.
Second, the Insolvency and Bankruptcy Code (IBC) came into force and the 270-day norm would be coming up for some of these cases. There was an evident haste in concluding that the IBC would be a panacea for NPAs. What has been noticed during the course of the stories playing out is that the resolution processes are complex and the bidding system controversial, as promoters have been trying to get back their own assets. To top it all, promoters are quite expectedly using litigation to prolong the resolution process, which builds another hurdle. It does look like that the haircuts would be deep for most of these cases, which means that the balance sheets of banks would be affected further. And, this would drag into FY19.
Third, the government has worked relentlessly to capitalise public sector banks. This has been done through direct infusion as well as recap bonds provided for in the Budget. The allocation has been pragmatic to all banks, which deserve the same. There has been some apprehension on the approach of using accounting practices to capitalise banks, but it definitely does help the concerned banks. However, until the NPA issue is resolved for these banks, the infusion of capital will, at best, help keep them afloat and address the issue of provisions, and may not be adequate for funding future growth. Therefore, more infusion may be required by the government.
Fourth, all the talks on disinvestment of the government stake in PSBs have not moved beyond discussion, with different views being expressed by government spokespersons at various points of time. Admittedly, it is an uphill task, as going below 51% is an ideological dilemma. Anything higher will help garner resources for the government, but not change the fundamental way of governance. Indradhanush had spoken of giving banks freedom in recruitment, ESOPs for management, and so on. But, there has been little movement here. This being the case, selling a part of the stake to, say, a private bank may not help in any kind of restructuring. The debate will carry on in FY19.
Fifth, governance lapses were noticed across all categories of banks. While the recent fraud emanating from specific companies in the jewellery segment has shaken the audit processes in the system, several non-PSBs have also been found to have understated their NPAs. This means that processes and procedures everywhere in the system need to be revamped and serious housekeeping is required to ensure that the probability of repetition of these deviances is reduced. The overhaul of the audit process would have to be taken up with alacrity by RBI in FY19.
Sixth, the combination of frauds in some banks and IBC presence has also slowed down banking activity, especially on the lending side. The threat of being referred to IBC, in case of a default, has made companies more cautious about investing money in new projects. This can be a serious problem for the economy, as such a fear can thwart the rate of growth of private investment, which is the missing piece in the growth story so far. Bankers are also wary of being caught in the web of the 3Cs—CBI, CAG and CVC—and could go slow on lending. This could be one of the inhibiting factors in the coming year when demand for credit picks up.
Seventh, there has been pressure on banks to push lending to the MSME sectors. This could be the next big challenge for banks from the point of view of a fresh build-up of NPAs. It should be remembered that the SME segment was affected the most by demonetisation and GST, and, hence, their ability to service debt could also come under pressure. While financial inclusion is necessary, aggressive lending to this sector could have its pitfalls, which is what should be looked at closely in FY19.
Eighth, banks were affected by the sudden hardening of yields on government bonds as a result of the prices falling, with RBI indicating that it expects inflation to go up. This led to a MTM problem for banks, which were already saddled with making higher provisions on NPAs. Further erosion has been prevented by the government in March by announcing a lower level of borrowing for the first half of FY19. But, we have only delayed the inevitable as the second half will turn sticky for banks.
Ninth, banks were caught in a situation where growth in deposits slowed down considerably. In FY17, they had increased sharply on account of demonetisation where households had to deposit their cash. In FY18, as currency entered the system, households withdrew money from their deposits, which led to a slowdown in growth. This got exacerbated when credit growth picked up, leading to a tight liquidity situation.
Tenth, lending has gravitated towards the retail-end, which has been a silver lining for the system. PSBs too have been aggressive here, as it is a safer avenue. In FY19, banks, however, will have to strike a balance with lending to other sectors to avoid concentration in assets as well as enable funding for other productive assets.
Banks have also witnessed some very positive developments in the form of successful IPO of a new bank, well-functioning of the payments banks and small banks. More importantly, there has been a jump in the use of alternative methods of payment through the electronic mode. The volumes registered on UPI, IMPS, NACH, cards, etc, have witnessed smart increases this year, thus, meeting the objective of the government to go digital.
FY19 will be a period of some serious house-cleaning for the banking sector so that the final balance sheet looks more reliable and credible. In a way, it was fortuitous that most of the slips took place in FY18, when such operations were on the way so that the spring cleaning can be extended to other parts of the system too.
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