Amid rising NPAs and PNB fraud, PSU banks face credibility crisis


New Delhi, Feb 26: In less than a fortnight, the credibility of public sector banks (PSBs), which commands about 70% share of bank loan market, took a serious hit. And three incidents have contributed to this fracas.
First, the country’s largest bank – State Bank of India (SBI) – reported its first quarterly loss in 19 years. Second, Bank of Baroda’s (BoB’s) decision to shut operations in South Africa. BoB came under scanner after it emerged in April 2016 as the only bank willing to do business with the Gupta brothers – Ajay, Atul, and Rajesh – who are accused of benefiting unduly due to their closeness to former president Jacob Zuma and his family members. Three, the Rs 114-billion fraud in Punjab National Bank (PNB) through letters of undertaking (LoUs) issued to jewellery designer Nirav Modi and Gitanjali Group.
No wonder, the Nifty PSU Bank Index has fallen 17% in the past month, and there are expectations that things may worsen.
“The PNB fraud is definitely a shock. As far as cases like Vijay Mallya or the Gupta brothers go, the board of the bank had made the decisions to lend. That is still a comfort. In PNB’s case, it seems only two-three employees were aware. This is quite different and much more difficult to understand,” said a former Reserve Bank of India (RBI) deputy governor. According to him, the banking sector’s credibility is on thin ice. Unless the government takes strict steps, things could get worse.
This crisis comes at a time when there was a feeling that the government’s Rs 2.11-trillion recapitalisation largesse would provide enough ‘growth capital’ to banks to kick-start the economy suffering from the dual shocks of demonetisation and the goods and services tax. Even SBI Chairman Rajnish Kumar had recently said at the World Economic Forum in Davos that the bank would use the entire amount it receives – Rs 88 billion – from the government’s package to fund growth. Now, it seems, these numbers may not be enough and the ‘growth capital’ that banks get would be spent more on provisioning and cleaning up their books.
Sample this: The government was planning to give PNB Rs 57 billion for recapitalisation. The fraud is double that figure.
In its third quarter results, SBI said there was a divergence between the assessment of non-performing assets (NPAs) of the RBI and the bank’s and there was a difference of more than Rs 230 billion at the end of FY17 and the burden of provisioning for this was more than Rs 60 billion.
That’s not all. With the RBI banning all debt recast plans, around Rs 2.8 trillion worth of loans, where payments have remained outstanding for 60-90 days, are under threat of becoming NPAs. This implies significantly higher provisioning.
“With the government being the majority owner of PSBs, any additional loss on account of higher NPAs due to additions in new NPA resolution scheme or due to extraneous reasons has to be covered by additional infusion of capital over and above the Rs 2.11 trillion. This will hold more so, if any bank is unable to make provisions from internal funds,” said Madan Sabnavis, chief economist, Icra.
There are doubts on whether the recapitalisation will work.
Says Nilesh Shah, managing director, Kotak Mutual Fund: “The recapitalisation package announced is likely to be inadequate for some reasons. PSBs have incurred more than the anticipated treasury losses due to rising yields; the new circular from the RBI to close various packages in favour of one single way of treating NPA is likely to increase NPA and the need for provisioning; there could be higher provisioning on cases referred in the National Company Law Tribunal. It is also corroborated from the announcement of capital-raising from a few PSBs.”
According to him, the main issue is compensation of top management of PSBs and the administrative freedom to do the work without external influence.