Jaitley should spare zombie banks from dividend payments until they pass tough phase

Private sector banks have largely managed to keep their performance intact in the January-March quarter, except in a few cases, where non-performing assets (NPAs) and subsequent provisions showed an increase. Going by current indications, that wouldn’t be the case with most of the public sector banks (PSBs). These entities continue to be in trouble. Stressed assets in these banks continue to swell; the capital gap is only getting bigger with the government refraining from recapitalising them adequately. There aren’t any strong signs of recovery yet, at least until now. Traditionally, both the government and government-owned banks prefer to keep the rot hidden within so that investors don’t panic and the books look relatively clean. In short, some of the state-run banks are akin to Zombies kept alive only by the fact that as government-owned entities, they won’t go bust. But the crisis is beginning to show up. [caption id=“attachment_2228482” align=“alignleft” width=“380”]  Arun Jaitely should pay attention to the request from the 3 state-run banks.[/caption] According to a PTI report, at least three state-run banks — Bank of India, Union Bank of India and Allahabad Bank — have already sought exemption from the government from dividend payments citing higher provisioning burden for bad loans. Other banks may also follow suit. It is doubtful whether a cash-constrained government will agree to exempt these entities from dividend making payments. Remember, banks have sought such an exemption even after the Reserve Bank of India (RBI) recently permitting them to use part of the buffer to make bad loan provisions. Exemption from dividend payments, at least until the bad phase gets over, can surely offer some relief to banks. In 2013-14, PSBs paid a total dividend of Rs 8,280 crore to shareholders, including to its majority shareholder — the government. This figure includes the dividend distribution tax. Going by the budget estimates 2015-16, the projections from ‘dividend and profit’ from public sector companies and banks has been pegged at about Rs 1,00,651 crore, a sizeable share of which is from state-run banks. But the three state-run banks’ request to get an exemption from dividend payment shows how difficult a financial position these banks are in. Finance Minister Arun Jaitely should pay attention to this request for a few logical reasons: One, so far the government has conveniently escaped from its responsibility of providing capital to state-run banks saying only the performers will be rewarded. This is hardly fair, for these entities are in a mess precisely because they were deprived of autonomy and forced to lend to unprofitable sectors, not to speak of crony capitalists. The government infused only Rs 6,990 crore in select state-run banks in 2014-15, much lower than the promised Rs 11,200 crore. In 2015-16 too, the budgeted capital infusion is just Rs 7,940 crore - nearly half of what state-run banks require. Since the government has suddenly cut down capital infusion in these banks, it has a responsibility to help them find capital. The government wants state-run banks to raise money from the market but banks have responded saying this isn’t a practical solution since there is not much investor interest in these banks. Two, state-run banks’ capital worries are set to get even bigger since a recent change in the norms by the Reserve Bank of India (RBI) would now require them to treat all restructured loans from 1 April 2015 on a par with bad loans when it comes to provisions. This would mean provisioning for a newly restructured loan goes up to 15 percent equal to that of a bad loan. For a loan that has gone fully bad, the provisioning burden can go up to 100 percent of the loan amount. Earlier, the provision for a newly restructured loan was 5 percent of the loan amount. The impact of the fresh provisioning norms will be visible from the April-June quarter. Third, the bad loan scenario has not shown any improvement in the past years with total gross NPAs touching approximately Rs 3 lakh crore at the end of the December quarter. Of the total NPAs, over 90 per cent is with the state-run banks. Arguably, no one — neither the government nor the regulator — has a clue on the full picture of bad loans in the banking system. The bigger danger is hidden NPAs — those that are not declared — in the banking system. For years, banks have been pushing many infrastructure loans to the restructured category to avoid letting them turn bad. This leeway is not available from now on. Total stressed assets in the banking system are currently estimated about 12 percent to 14 percent. Any improvement in the bad loan scenario of state-run banks can happen only with strong recovery on the ground. At least going by the latest data points, so far there are no indications of this happening. Growth in core sectors has so far refused to recover in a major way. Fourth, the government proposes to create a Bank Boards Bureau to help state-run banks raise capital. This is a good move but clearly, not a solution to meet the capital requirements in the short term. In short, until the time the government continues to be the owner of state-run banks, the onus of capitalising state-run banks rests with the government. If Jaitely, working with a fiscally constrained exchequer, do not want to fund public banks, it is fine. But he should show the willingness to offer a road map for them to become self sufficient in terms of capital. The process should be aided by assistance in the short-term. Giving up the dividend receipts at least until state-run banks tide over the tough phase is a good way of doing it. At least, that could help some of the weaker banks to keep their heads above water. (Data support from Kishor Kadam)