EXCLUSIVE Even as our politicians are slugging it out in the run-up to elections 2014, large sections of the Indian banking system are about to be gutted by bad loans – something that the two-day public sector bank staff strike will do nothing to mitigate.
By the time the next government is sworn in, India will run smack into a full-blown financial sector crisis led by one or two about-to-fail public sector banks.
Warning signals are flashing in several banks, with the United Bank of India (UBI) being the first to send up distress flares by stopping almost all new loans. According to a Mint report that quotes unnamed bank officials, no fresh loans are to be made without the backing of fixed deposit as collateral - as an interim measure.
Last Friday over the weekend, the bank reported a humongous Rs 1,238 crore third quarter loss despite providing Rs 1,858 crore for bad loans. In the quarter before that, the bank had notched up a Rs 489 crore loss, and an alarmed Reserve Bank of India (RBI), after a forensic audit, imposed a Rs 10 crore limit on fresh bank loans. Now, of course, all loans are off.
The stock markets are already reflecting this reality. You can buy United Bank if you have just around Rs 1,500 crore - for that's the market capitalisation of the bank on the Bombay Stock Exchange.
But you still wouldn't get a bargain, for what is visible is only the tip of the bad loan iceberg.
The bank’s bad loan book is nearly 11 percent of total loans (Rs 8,545 crore), and the losses not provided for – also known as net non-performing assets – are at 7.5 percent of the loan book (or Rs 5,630 crore). If you add the bank’s restructured loans – loans that would have gone bad if not rescheduled – nearly 20 percent of the bank’s loan book is contaminated.
With its capital adequacy depleting fast, it is no surprise that United Bank cannot really lend any more. In fact, its loan book was shrinking even before the management formally banned new loans. Between the second and third quarters, the bank’s loans actually shrank by around Rs 2,000 crore.
At the end of the third quarter ended 31 December 2013, the bank had a capital adequacy ratio of 9.93 – and by now the number could be hitting the bare minimum of 9 percent required under Basel norms.
So what does all this mean? It means if United Bank of India had not been a government-owned bank, it would have been on the brink – and a ripe candidate for merger or acquisition or closure. It has to be recapitalised fast – and the finance ministry has no cash.
But UBI is not the only public sector bank up the creek without a paddle – or capital. A whole host of public sector banks is in the same sinking boat, and, according to Tamal Bandyopadhyay, a keen observer of the banking scene, at least seven public sector banks – UBI, Punjab National Bank, Central Bank of India, Andhra Bank, IDBI Bank, Indian Overseas Bank and State Bank of Mysore – have gross bad loans (that is, bad loans before accounting for provisions) that are above five percent of their total advances.
And remember, the biggest daddy of them all, the State Bank of India (SBI) is yet to announce its results – due this Friday (14 February). God knows what kind of worms will crawl out of its closet. At the end of the second quarter, SBI had gross NPAs of 5.64 percent, and no one is betting the situation is going to be any better in the latest quarter.
By March-end 2014, the banking sector’s bad loans figure could be nearly Rs 3,00,000 crore.
The RBI had flagged these concerns in its financial stability report of December, and noted: “Asset quality continues to be a major concern for SCBs (scheduled commercial banks). The GNPA (gross NPAs) ratio of SCBs increased to 4.2 percent as at end September 2013 from 3.4 percent of March 2013. The restructured standard advances also increased to 6 percent of total advances as at end September 2013 from 5.8 percent of March 2013. Overall the stressed advances rose significantly to 10.2 percent of total advances as at end September 2013 from 9.2 percent of March 2013. Among the bank-groups, the public sector banks continue to have distinctly higher stressed advances at 12.3 percent of total advances, of which restructured standard advances were around 7.4 percent.”
Not surprisingly, the market certainly does not believe that the banking industry is anywhere near a turnaround, as further evidenced by the fact that SBI’s own preferential issue of Rs 9,000 crore needed the Life Insurance Corporation to bail it out.
If the biggest Indian bank – which is too big to fail and whose solvency can never be in doubt – cannot raise money despite all the implicit sovereign guarantees embedded in it, this is a telling indictment of how our banks have been run – or rather, run into the ground.
The sad reality of Indian banking right now is that most of the public sector component is badly in need of capital at a time when the government is short of cash and needs to bring down its fiscal deficit.
In this situation, the government is asking the Life Insurance Corporation (LIC) to invest in bank capital – as it did in 2012. According to this Business Standard report, many public sector banks – among them Dena Bank – have approached it for capital. State Bank, as we know, has already been bailed out by LIC.
If LIC has to bail out many banks, including the biggest one, and if even public sector disinvestment needs LIC support masquerading as a sound investment decision, and if ONGC and Oil India are also supposed to bail out the same disinvestment plan by buying out a 10 percent stake in Indian Oil, it is clear that both disinvestment and bank recapitalisation are a hoax.
The UPA government is about to land India in a full-blown fiscal crisis whose first manifestations will be in the financial sector – especially banking.
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