Government to assess banks on basis of efficiency, business growth before funds infusion

NEW DELHI: The government may make a dramatic shift in the principle underlying capital infusion in state-run banks, making such exercises contingent on performance rather than desperate need, as it looks to encourage managers to start running banks as businesses and also build the case for consolidation in the sector. If put into practice, the change could be initiated from the next fiscal year.
This will serve a two-fold purpose — the better-performing banks will have more capital and thus be well-positioned to meet credit demand and aid economic recovery in the country while laggards will be forced to improve if they want more support, two officials involved in the process told ET. They indicated that the Budget could set aside about Rs 10,000 crore for this purpose.

“The Centre cannot continue to blindly infuse capital as it has its own constraints,” said one of the government officials.

The government official, however, clarified that ailing banks won’t be left in the lurch. “This is not to say we will not support banks to meet the regulatory requirements, but they will also need to consolidate their balance sheet.” Most state-run banks that have declared December quarter results thus far have shown a deterioration in performance with gross non-performing assets (NPAs) rising to nearly 6% of advances. Such losses will eat up capital, burdening the government with the need to provide more support.

“We will assess banks on the parameters of both efficiency and business growth, which include return on assets (RoA), net interest margin (NIM), reduction in NPAs and credit growth,” said another government official, adding that banks will be ranked on these parameters before a decision on capital support. India Ratings, a Fitch Group company, has pointed to the disproportionate capital needs of middling, state-run banks.

“Mid-sized PSBs (public sector banks), which add up to 19% of the banking system profits (for FY14) and require 35% of Basel III Tier-1 (capital) requirement, would be under pressure to consolidate their growth and focus on profitability,” it said in a report released on Thursday. This possible shift in strategy is in sync with the government’s plan to nudge smaller banks to follow a more differentiated credit approach in keeping with their size. “Earlier this year, at the PSB banking conclave Gyan Sangam, it was decided that small public-sector banks will reorient their portfolios to focus on specific niches to build capabilities and optimise capital,” said the official cited above. At the same conclave, Prime Minister Narendra Modi called on stateowned lenders to be run on strict business principles without fear of political interference.

Resource constraints have already forced the government to cut support to banks. In the current fiscal, only Rs 11,200 crore has been set aside for capital infusion in state-run banks, down from Rs 14,000 crore in the year before. The government has allowed state-run banks to raise equity subject to the condition that its stake remains at 52%. If the new plan comes into force, banks with slippages will be asked to reorient their business strategy and focus on areas where risks are considerably less, such as retail lending, so that they don’t need to make large provisions for loans sanctioned. “Each PSB cannot be a clone of another. They need to find their own niche areas,” said the first official cited above, adding that only banks with strong balance sheets will be able to find investors for their public or private placement issues. Experts back the concept of a nuanced capital infusion strategy.

“If NPAs are high and other operating ratios are also lagging behind then it’s a reflection on the bank’s performance,” said Amit Jain, partner at BMR Associates.

“The government is right if it is setting some accountability standards before infusing any more public money.” The differentiation will also pave the way for consolidation with weaker banks being forced to merge with stronger ones.