Budget 2015: Jaitley should unveil a solid plan to refuel NPA-ridden public banks

The Narendra Modi government has so far remained somewhat non-committal when it comes to the issue of capitalisation of state-run banks, which are reeling under heavy non-performing assets (NPA).

The steps taken so far, such as offering capital only to those banks that are deemed efficient, are largely cosmetic since these entities have lacked autonomy and are often micromanaged institutions for several years now.

Whether the budget will offer a roadmap for bank capitalisation, is something keenly watched by economists and financial sector watchers, who aren’t quite impressed with India’s China-matching growth rate as depicted in the re-based GDP numbers.

The reason: unless the state-run banks, which control about 70 percent of the banking industry, are refuelled with adequate funds, it is difficult to take the economy back on track by expanding the much-need credit support to industries and individuals.

But, the government banks, which are neck-deep in bad debt, require substantial amount of capital to revitalise their operations but the capital support from the government has been weak so far.

Of the committed Rs 11,200 crore capital in state-run banks for 2014-15, the government has so far infused only about Rs 6,990 crore in a handful of large banks.

Funding the India-story

With the ability of a fiscally constrained government limited to push growth by way of public spending, the onus of breathing back life back into the economy largely rests with banks, especially state-run banks.

A significant portion of corporations remain heavily dependent on bad loans even though some top-rated companies have tapped the bond market. But that’s not the case with majority.

One of the reasons for the slow-credit offtake seen in the recent years is the capital shortage of state-run banks. In the last two years, in particular, loan growth has been anemic.

On the other hand, most of the companies had seen an escalation in their project costs in the face of high interest rates and demand slowdown in a sluggish economy.

Subsequently, many companies had to opt for loan restructuring to stay afloat in the business. To get these projects up and running again, companies need cash and state-run bank’s capitalisation is highly critical.

While the revised GDP numbers suggest a new picture of the economy is indeed on course of recovery, some of the macro-economic indicators haven’t supported the super-growth story.

For instance, bank lending to industry has grown by just 2.1 percent for the fiscal year until December as compared with 8.1 percent in the corresponding period last year.

Even in the infrastructure segment, which consists of power, telecom and roads, loan growth has remained tepid at 6.8 percent compared with 10.3 percent a year back.

Absence of a pick-up in fresh money flow to industries indicates some sort of mismatch in the GDP numbers and the actual situation on the ground.

Widening capital gap

As Firstpost has noted earlier, government banks would need a substantial amount of capital to meet the mandatory capital requirements under the Basel-III norms, to make provisions for a sizeable chunk of stressed assets on their books and to get ready for an expected pick up in credit growth.

The estimated equity capital requirement for state-run banks to meet the Basel-III norms alone is about Rs 2.4 lakh crore.

Basel-III is the advanced capital norms all banks worldwide need to comply with in a phased manner. For Indian banks, the deadline is 2019. With the deadline to meet the advanced capital requirements under the Basel III norms fast approaching, sate-run banks will need to raise substantial amount of capital.

Global ratings agency Moody’s Investors Service estimates the state-run banks would need anything between Rs 1.5 lakh crore and Rs 2.2 lakh crore, or $26 billion and $37 billion, to comply with Basel-III.

Remember, this estimate covers just 11 state-run banks that the agency rates. These are estimates and the actual requirement could vary, likely on the upside.

Basel-III requirement is only one side of the story. The bigger worry is the stressed asset scenario, which could emerge as a major risk for state-run banks.

At present, the stated amount of bad loans or NPAs in the banking system is Rs 2.9 lakh crore, while the restructured loans are estimated to be between Rs 5 lakh crore and Rs 6 lakh crore.

According to the PJ Nayak committee, which looked at various aspects of public sector banks, state-run banks would need over Rs 3 lakh crore capital if their loan book grows 16 percent per year and if about one-third of their restructured loan portfolio turns bad.

Global rating agencies have already sounded caution saying the government must offer a clear, convincing picture of structural reforms in the economy to get the economy back on actual growth path and fiscal prudence.

Until the time the government remains the majority owner in state-run banks, it can’t escape from the responsibility of funding these entities. The budget will be keenly watched on this.