Government of India is considering the merger least four public sector banks: Bank of Baroda, IDBI Bank, Oriental Bank of Commerce and Central Bank of India. The combined loss of these famous four is Rs.21,646 crore.
IDBI Bank alone accounts for 38 per cent of the losses. Oriental Bank of Commerce comes next followed by Central Bank of India and Bank of Baroda. This merger would result in the emergence of one of the biggest banks in India, next only to State Bank of India. Does the Indian banking sector need a bigger bad bank?
Reducing the number of public sector banks by mergers cannot ensure improvement in their viability. State Bank learnt this at its cost. Post merger its Gross NPA is a massive 27.49 per cent.
The Regulator’s Concern
The Reserve Bank of India’s latest Financial Stability Report has expressed strong concerns about the risk involved in recoveries. “Macro-stress tests indicate that under the baseline scenario of current macroeconomic outlook, scheduled commercial banks’ Gross NPA ratio may rise from 11.6 per cent in March 2018 and to 12.2 per cent by March 2019. The system-level capital to risk-weighted assets ratio (CRAR) may come down from 13.5 per cent to 12.8 per cent. The eleven public sector banks under Prompt Corrective Action framework may experience a worsening of their GNPA ratio from 21.0 per cent in March 2018 to 22.3 per cent, with six PCA PSBs likely experiencing capital shortfall relative to the required minimum CRAR of 9 per cent.” Doesn’t sound music to anyone’s ears.
During FY 2018, the profitability of commercial banks has declined, partly due to the necessity of increasing the provisions for the growing NPAs. While this has added pressure on SCBs’ regulatory capital ratios, the provision coverage ratio has increased. Incidentally, it may be added that the total GNPA of the banking sector has been rising, more than proportionately during some years.
Big Banks and Bigger NPA
The Indian banking sector has more small borrowing accounts than large borrowing accounts. The share of the volume of credit availed by big borrowers of above Rs.5 crore is as high as 55 per cent of the total advances and 85 per cent of the entire NPA. The top 100 big borrowers’ share in total advances is around 15 per cent, and their ‘contribution’ to total NPA is 26 per cent.
Many of the big scams, now coming to light, are from the stables of big banks and the vast amounts lent to large borrowers. Some of the well-established banks having stable growth for decades are now burdened with substantial gross non-performing assets, which cannot be readily liquidated. The number of big banks in this category is increasing.
On the other extreme, there are many medium-sized banks as well as small banks, which do not hanker for significant advances and, therefore, do not suffer the burden of non-performing assets. And of late, small finance banks have entered the banking scene and they have been successful in reaching out to a large number of small borrowers. They may not become a source of trouble for the Regulator, unlike the big banks sitting on substantial stressed assets.
LIC to swim in troubled waters
It is not clear as to what has induced Life Insurance Corporation of India to invest Rs.13,000 crore to get a 51per cent stake in IDBI bank without management control. IDBI has already become a ‘bad bank.’ It has a cumulative loss of Rs.13,396 crore during the last three years. If LIC is planning a rescue operation for IDBI, it would be disastrous. The high valued securities pledged to the Bank cannot be easily monetised as a part of the recovery drive. The Bank’s failure to auction one of the prime immovable assets in Bengaluru is an indication of the uncertainty of recovery through sale of other assets.
LIC already has share-holdings of 8 per cent in six public sector banks, which are not in good health. The percentage of stressed assets of these banks is quite high, accounting for 8 per cent of the total NPAs of the banking sector. IDBI cannot be salvaged by the entry of LIC into its financial predicament.
