A few of the eleven public sector banks that are under the Reserve Bank of India’s prompt corrective action may find it difficult to survive on their own steam. Despite being under corrective action since last year, most of the these lenders have seen their financial performance worsen in the year ended March 2018.
It may stay that way and at least half of these banks may stagnate and eventually “lose their independent identity” SS Mundra, a career public sector banker and former deputy governor of the RBI told BloombergQuint in an interview.
I don’t see a very convincing road map for them, under which they can justify existence as independent entities. That being the case, to my mind, at least half of these cases may stagnate.SS Mundra, Former Deputy Governor, Reserve Bank of India
Ten of the eleven banks under corrective action have reported earnings for the fourth quarter. Nine of them have reported a further deterioration in the level of net non-performing assets. They have also continued to report a negative return on assets due to large losses incurred by most lenders in the fourth quarter.
The RBI’s corrective action framework is based on three parameters -- the level of net NPAs, the return on assets and capital adequacy. Most of the banks meet the threshold for minimum capital adequacy due to capital provided by the government but fall into different risk categories based on the level of bad loans and their negative return on assets.
Among the 11 lenders, only Bank of India has shown an improvement in its net NPA level, although it reported a negative return on assets.
“If you look back at history and also in recent cases, getting out of PCA has been a very long process. What we have seen in recent cases is also like a status quo or further deterioration,” Mundra said.
In such a scenario, should the RBI go ahead and enforce even stricter corrective action via lending restrictions? The regulator has already taken that route in the case of Dena Bank, which has been asked to stop fresh lending. Allahabad Bank has been asked not to expand its risk weighted assets, suggesting that it can do only small amounts of new lending.
Also Read: What Happens When A Bank Stops Lending?
Should the RBI follow a similar strategy for the other weak banks and convert them into ‘narrow banks’, which can accept deposits but not lend? Mundra indicates that he is not opposed to the idea.
If there are enough reasons to believe that incremental lending may not be able to deal with the problems which are already being faced, then it could be important to first ask these entities to completely focus their time, energy and resources and dealing with existing problems which are sitting with them....To have unrealistic expectations and keep on ignoring the reality on the ground would not be a good thing for a regulator to do.SS Mundra, Former Deputy Governor, Reserve Bank of India
Most of the banks under the RBI’s PCA framework are already seeing a contraction of their loan book, even though the deposit book remains steady. In that scenario, the bank’s ability to earn would stagnate, leaving few options but to merge them with larger lenders at some stage.
“They may stagnate for a while and become a right case to lose their identity and then continue to operate as a consolidated entity. That looks like a more likely outcome and course of action which could be adopted,” Mundra said.