One of the themes I have regularly explored is the mess that public sector banks are in. Some fresh data coming in shows that the situation continues to be hopeless. The following table shows the loan-write-offs of the various public sector banks over the last decade.
(in Rs crore)
Source: Reserve Bank of India
The above table clearly shows that the loan write-offs of public sector banks have clearly gone up majorly over the last ten years. Banks essentially raise deposits to give out loans. These loans are typically (though not always) given against a collateral. This is done, in order to ensure that if the borrower stops repaying the loan, then the collateral can be seized and the outstanding loan amount can be collected.
But things don’t always turn out like that. Banks are not able to collect every loan that is defaulted on. In the end, they need to write-off these uncollected loans. As can be seen from the above table, the write-offs of public sector banks in India have gone up dramatically over the years. What this tells us is that over the years, banks have been unable to collect a greater amount of loans that have been defaulted on. Indeed, this is a worrying trend.
Now take a look at the following table. This shows that the banks are able to recover some amount of loans that have been defaulted on.
|Year||Recovery (in Rs crore)|
Source: Reserve Bank of India
What the above table tells us is that the recovery of defaulted loans has been lower than the write-offs in each of the last four financial years. What this clearly tells us is that the ability of public sector banks to recover defaulted loans is limited. In fact, between 2013-2014 and 2015-2016 the ratio of write-offs to recovered loans has gone up from 1.02 to 1.51. This is not a healthy trend.
Let’s look at the numbers of the State Bank of India group (i.e. the State Bank of India and its associate banks).
|Year||Write-offs (in Rs crore)||Recovery (in Rs crore)||Ratio (Write-offs/Recoveries)|
What the above table clearly shows us is that write-offs as a proportion of recoveries have gone up over the years. What is true for the public sector banks as a whole is also true for the SBI group.
In this scenario of increasing write-offs in comparison to recoveries, it is hardly surprising that the government has to keep putting money into these banks. Earlier this month, on July 19, the government decided to pump in Rs 22,915 crore, into thirteen public sector banks.
|S. No.||Name of Bank||Amount (in crore)|
|2||Bank of India||1784|
|4||Central Bank of India||1729|
|7||Indian Overseas Bank||3101|
|8||Punjab National Bank||2816|
|9||State Bank of India||7575|
|12||Union Bank of India||721|
|13||United Bank of India||810|
It needs to be pointed out here that the government has already infused Rs 1.02 lakh crore of capital between 2009 and September 2015 into public sector banks. For 2016-2017, the government has budgeted Rs 25,000 crore to be invested in public sector banks.
In fact, as the finance Arun Jaitley, said in his February 2016, budget speech: “If additional capital is required by these Banks, we will find the resources for doing so. We stand solidly behind these Banks.” This was Jaitley’s way of saying that the government will do whatever it takes to keep these banks going.
Of the Rs 25,000 crore allocated towards recapitalization of banks at the beginning of the financial year, Rs 22,915 crore has been allocated to thirteen banks. Of this, the State Bank of India gets Rs 7,575 crore or a third of the allocated amount. 75 per cent of the allocated amount will be released immediately to banks and the remaining will be released later, depending on the performance of the bank.
As of March 31,2016, the total bad loans of public sector banks stood at Rs 4,76,816 crore or 9.32 per cent of the total advances. As of March 31, 2015, the total bad loans had stood at Rs 2,67,065 crore or 5.43 per cent of the total advances. This basically means that during the course of one year, the bad loans have jumped up dramatically. The only reason for this is that, the public sector banks up until now were not recognising bad loans as bad loans. Now the Reserve Bank of India is forcing them to do that.
As we have seen earlier the recovery rate of bad loans of public sector banks is very low. Given this, a significant portion of the bad loans will have to be written-off in the years to come. Hence, Rs 22,915 crore of recapitalization is not going to be anywhere near enough.
Further, as per the Indradhanush Reforms released in August 2015, the capital requirement of public sector banks up to March 31, 2019, has been estimated to be around Rs 1,80,000 crore. Of this, the government will invest Rs 70,000 crore and the remaining the banks are expected to raise from the market.
As the bad loans number of Rs 4,76,816 crore tells us, Rs 70,000 crore will turn out to be a terrible underestimate. In fact, some other forecasts, are way bigger than what the government is estimating.
The PJ Nayak Committee has estimated that the that banks will need a capital of Rs 5.87 lakh crore. The committee further assumes that if the government puts in 60 per cent of the amount then it will need Rs 3.5 lakh crore.
Another estimate made by Viral Acharya of Stern School of Business and Krishnamurthy V Subramanian of the Indian School of Business, in a research paper titled State intervention in banking: the relative health of Indian public sector and private sector banks, suggests bigger numbers.
The professors come up with three scenarios. In what they call the extremely prudent scenario they feel that the public sector banks will need around Rs 9,97,400 crore of capital. In the less prudent scenario, banks will need Rs 6,53,300 crore of capital. In the least prudent scenario banks would need Rs 5,12,300 crore of capital.
It needs to be pointed out that not all of this capital will be required because of bad loans. Basel III norms which require banks to hold greater amount of capital against the loans they give out, come into effect from April 1, 2019. Banks need to prepare to move towards Basel III norms.
In a recent research report Suresh Ganapathy of Macquarie wrote that banks need at least Rs 1.6 lakh crore over the next three years, compared to the Rs 45,000 crore that the government plans to invest.
If the government decides to fund this money out of its own pocket, the fiscal deficit is likely to go through the roof. Fiscal deficit is the difference between what the government earns and what it spends.
In the end the government will have no option but to sell some of these banks. The thing is it will take its own sweet time doing the same.
To conclude, the mess in public sector banks, is not going away any time soon.
The column originally appeared on Vivek Kaul’s Diary on July 29, 2016