Can PM Modi Cure The Public Sector Banks' 'Begging Bowl Syndrome'?

By M H AHSSAN | INNLIVE

The Modi-government's decision to front load the annual capital infusion for public sector banks (PSBs) may have come as an immediate relief for some of the cash-strapped public sector banks (PSBs). But, it is only a painkiller, not a medicine that can cure India's state-run banks from the 'begging bowl syndrome' or the ritual of lining up before the North Block every year to get government funds to stay afloat.

The announcement hasn't really impressed rating agencies. In a note issued on Wednesday, rating agency, ICRA said capital infusion has come too little considering the requirement of these lenders.

According to the rating agency, the PSBs would require capital in the range of Rs 40,000 crore to Rs 50,000 crore as compared with Rs 22,900 crore that the government has infused. In total, the government plans to infuse Rs 25,000 crore for the full year.

"This shortfall in allocation could continue to impact the PSB's loan book growth in FY2017 as the possibility of large quantum of capital raising from non-government sources remain limited as of now and PSBs internal capital generation is likely to remain muted on the back of significant pressure on their asset quality." To put it in simple words, there are no takers for PSBs in the market if they want to raise more funds.

Not just ICRA, the global rating agency, Fitch ratings too have said that pressure will remain on state-run banks despite the current round of capital infusion. Fitch estimates Indian banks will need $90 billion in total additional capital - most of which will be accounted for by the public banks - to meet Basel III requirements by 2019, it said.

"Pressures on public bank credit profiles will remain, and more capital than the Rs 70,000 crore earmarked through to fiscal year 2019 will be needed from the government to restore market confidence and position the sector for long-term growth," Fitch said.

Rest of the banks except the ones in the 'begging bowl' list (State Bank of India has the largest pie getting Rs7,500 crore of the thirteen banks getting capital infusion) will have to fend for themselves.

Sarkari banks' woes:
The reason for pessimism on the part of credit rating agencies regarding state-run banks is obvious. Their balance sheet sizes aren't in a good shape, as is evident from the ongoing bad loan clean-up exercise in their books. Also, the high provision (money set aside to cover such loans) associated to this has jacked up their capital requirements many fold. PSB's losses have escalated sharply in the second half of the fiscal year ending March 2016-Rs 38,407 crore. Their NPAs have gone up by an additional Rs 2.26 lakh crore in this period. As a point of comparison, the loss figure is nearly double the government's capital injection in fiscal year 2016 and eroded the equivalent of nearly 15 percent of end-FY'15 capital. This caused loan-book contraction at many public banks, which brought sector-wide credit growth to below 10 per cent in fiscal year '16, the lowest increase in a decade.

Bad loans and associated provisions are only one part of the overall capital problem. Banks need money to meet the Basel-III norms and expand credit when the loan demand picks up in the economy. Clearly, the government's ability to continue to feed the state-run banks, in some of which it has ownership above 75 percent, is doubtful. As the raters pointed out, even this year, the government hasn't been able to provide the required capital for the banks. With there being no sign of improvement in the health of their balance sheets, things are going to be even more difficult for PSBs and their owner (the government) in the approaching years. In other words, India's sarkari banks are so used to the 'begging bowl syndrome'.

Forty seven years after Indira Gandhi announced their nationalization, what has changed in the functioning of banks? The short answer is nothing much. Except the largely cosmetic changes government-programmes like 'Indradhanush' offer, PSBs continues to be largely extended arms of the government. A large part of the burden of social sector funding, priority sector lending and making government schemes successful still fall on them on a regular basis. This is something Reserve Bank of India (RBI) governor Raghuram Rajan has highlighted in the recent past. Similarly, these entities have been easy targets for the corporate-political nexus for easy money for years.

But the major reason for the current NPA (Non-performing Assets) mess in these banks is their lack of efficiency in credit appraisal process and careless lending practices to grow their loan books. Till recently, every outgoing chairman wanted to show maximum growth in their business volume while little attention was paid on quality of growth. Autonomy of operations and scope to innovate was a word too distant for these entities. The idea of nationalization-take the banking services to millions of unbanked-has progressed but still remains a task far from the target.

The big and imminent problem for PSBs is that the industry around them is changing too fast. With new payments banks and small finance banks stepping in and existing private banks ramping up their technology base, the competition has intensified a lot. These new lenders are relying heavily on technology such as mobile and internet banking rather than traditional brick and mortar model. These banks typically target the young customer-segment in the urban, semi-urban areas that are tech savvy. In comparison to them, PSBs have failed to catch up in the desired manner.

The technology challenge:
How are PSBs poised in the new era of technology war? Nandan Nilekani, ex chairman of Unique Identification Authority of India (UIDAI) describes this problem in his recent Indian Express column. "The public sector banks, which occupy the commanding heights of the economy with a 70 percent market share, will be particularly challenged. Even as they deal with the inheritance of their losses, they will have to cope with, and master enormous digital disruption. This will require their owners, the government, to give them the autonomy and freedom to experiment and innovate." Nilekani is bang on here.

According to a 29 June Credit Suisse report, the advent of Unified Payment Interface (UPI) and Aadhaar bank linkage has set stage for a payment revolution in India's financial services industry. "The Indian payment system will now leapfrog to digital where cost of transactions will be near zero, customer ownership will rest with best interface providers and incumbency of deposits will be challenged," the report said. This, in turn, will result in new business models to emerge, which will be redefined and unserved markets open up as financial providers move from being data poor to data rich. We estimate the consumer and SME loan market will grow from US$600 billion to US$3,020 billion in the next ten years, it said.

Currently, India has 342.65 million internet users and 1 billion mobile phone users. Nilekani points out that already one billion Indians have Aadhaar numbers and over 280 million Indian residents have Aadhaar-linked bank accounts. The number of smart phone users in India is expected to increase to 700 million by 2020. "Those that are able to transform (The Quick) will not only survive but capture increasing market share. We expect private bank market share to rise from the current 23 percent to 37 percent over the next ten years as private banks are nimbler and currently have a disproportionate share of digital channels," says Credit Suisse report.

In other words, those banks which fail to make use of technology will perish. That's a strong warning to India's state-run banks which still are still heavily dependent on government capital for survival and do not have a self-sustainable model. If the Modi-government is serious in saving these banks, it will have to think of freeing these entities from the 'begging bowl syndrome'. Modi will have to rethink his aversion to the privatization of PSU banks. Unless the government let go of its control and let PSBs fend for themselves competing in a free market, there is no future for these entities.