The relevance of having 11 distressed public sector banks has often been questioned, despite them having a large borrower base with an outstanding loan book of about ₹ 17 trillion as of fiscal year 2017-18.
These 11 banks also hold close to ₹ 25 trillion worth of public deposits garnered across a massive network of over 30,000 branches. Their relevance is under debate because they are under the Reserve Bank of India’s (RBI) prompt corrective action (PCA). It is, essentially, a regulatory intensive care unit for sick banks with deep holes in their balance sheets.
Introduced in 2002, the objective of PCA is to try and reduce the stress on the balance sheet within a specific time.
True, these 11 lenders are more sick than the rest, with some having a bad loan stockpile double that of their net worth. So, RBI’s intensive care unit sounds perfect for them.
But an analysis of the financials of two banks that have been under PCA for more than two years shows it has done little to help them and in fact, it has caused more harm.
United Bank of India (UBI) was placed under corrective action in February 2014, while Indian Overseas Bank (IOB) found itself under PCA in October 2015.
UBI triggered alarm bells when its net non-performing assets (NPA) rose to over 7% in December 2013, triggering corrective action from the RBI. The bank focused on recovery but the improvement in its bad loan ratio over a two-year period was just 80 basis points to 5.9% in December 2015. The bank has since then reported far worse ratios and the net NPA ratio stood at an ugly 16.49% as of March. UBI made huge losses and its capital position also deteriorated rapidly.
IOB is in an even worse shape and, unlike UBI, had hardly reported any improvement in its metrics ever since it was put under PCA. IOB’s net NPAs have risen to a huge 25.28% as of March and its capital adequacy is below the regulatory minimum.
It is not surprising then that bankers abhor PCA and Punjab National Bank executives had said they would do everything to prevent their bank from coming under the PCA, when the lender reported a historic loss.
After all, the freedom to make decisions is snatched away and the core income of the bank is hit even though its expenses continue.
Perhaps, expecting PCA alone to fix everything would be erroneous. Intensive care is not just quarantine, but also medication. That is why PCA must be followed by other more critical measures for sick banks to become healthy.
Banking experts believe that lenders under PCA need huge capital infusion, which the government has provided. But most importantly, they need an overhaul of their management and boards. Governance is one area in which the government has chosen to remain mute. What is also needed is acceptance of the fact that some of them need to be merged or probably privatised.
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But T.T. Ram Mohan, professor of finance at Indian Institute of Management, Ahmedabad, thinks the government has not thought through banking reforms. “They have not worked out how to deal with the backlash if they move forward with a plan to consolidate these banks," he said.
Under PCA, the 11 lenders would soon risk becoming extremely narrow in their operations and some, like Dena Bank, can no longer lend. Their withering balance sheets each passing quarter is crying out for reform. Even as some of these lenders try hard to improve their operating metrics, whether they are doomed to become zombie banks is ultimately in the hands of the government.