Making PSBs Atmanirbhar

 

Make PSBs Atmanirbhar

To meet Post COVID challenges

The quarterly financial results of major PSBs/private banks and a few small finance banks relating to Q1FY22 have come in. While all of them posted net profit, though at varied levels, the common factor is the increase in GNPA, yoy as well as over sequential quarter The seriousness of the issue is yet to emerge due to restructuring options exercised/being explored, without the need to downgrade the standard assets concerned. The full impact might emerge post COVID normalisation. 

From FY 2022-23, banking system may be confronted with two major issues. 

1. Higher delinquencies in retail, msme, trade, micro and agri segments including the ones that were rehabilitated/ restructured. 

2. As economy returns to normalcy, there will be great demand particularly from the above segments.

Infusion of fresh capital is needed to provide for loss provisions as well as the capital requirements for meeting the increase in risk weighted assets due to credit expansion. The following buffers to mitigate capital needs might be withdrawn for new credit sanction/disbursals as economy will be on an upswing.

a.  Credit guarantee by the government.

b. Forbearance on applicable asset classification in case of restructuring. 

PSBs are expected to be impacted the most, as the capital infused thro' recap bonds had been used to  meet the increased provisions so as to keep the NNPA below the benchmark level of 4%. This may result in a situation of no adequate credit flow to the economy, though it is ready to grow at a higher pace. Due to extensive reach of the PSBs, which still account for 63% of gross bank credit, it is difficult to imagine a situation of all round development without their active participation. 

To help the economy revive itself, it is time for all stake holders to make the PSBs 'Atmanirbhar’(self-reliant).

My suggestions are as under:

Role of the Government:

Privatisation exercise should be kept in abeyance on two counts. PSBs offer the best bet to revive the demand in rural and semi urban areas and take care of the needs of small and micro enterprises. With the impact of the yet to be known increase in GNPA, the government may not find potential buyers/may have to sell the 'inherently strong' PSBs at  throw away prices. 

Bring in fresh equity to PSBs: This should be equivalent to take care of anticipated credit growth for the next three years and expected delinquency in the credit portfolio. The following measures can be adopted.

a. Pump in Core Equity: Through budget allocations. Also, permit strong banks to raise it from the market thro' rights issue, FPO, OFS etc. as Post COVID the market is expected to be vibrant to pick up issues from financial sector.

b.  AT1 Bonds: 1.5% of RWAs can be raised as AT1 Bonds to reach Tier I level of 7.0%, provided CET 1 is above 5.5%.  Banks should be encouraged to raise such bonds with a call option after 10 years and it can be guaranteed by the government to reduce the cost of borrowings

c.      Tier II Bonds:  To achieve CAR of 9.0%, banks can raise tier-II bonds upto 2.0%. A special window for subscribing to the Tier-II Bonds in the form of dollar bonds from NRIs can be explored. The bonds shall be for 10 years with guarantee from the government. The exchange risk shall be borne by RBI.  The bonds can be issued at a mark over the prevailing dollar deposit rates on the date of issue.

Speed up Legal Remedy Mechanism:

i.                   A special OTS window should be created in all PSBs with parameters largely defined so that the authorities are encouraged to take decisions without fear of accountability

ii.                 The number of days for resolution in IBC is now nearing 500 days. This has to be brought down to the level as per IBC.

Keep an arms’ length from credit sanctions or fixing targets. 

Role of Regulator:

1. As PSBs enjoy sovereign guarantee, reduce CAR norms to the international standards viz. 8.0% for atleast three years. Keep CCB in abeyance during that period. 

2. In respect of restructured assets falling into NPAs, the provision requirements may still be maintained at a lower level of 10%, while stipulating that unrealised interest be reversed/ accrued interest not accounted for.

3. For better transparency on stressed assets, suitable disclosure statements should be in place.

Role of the Banker:  

Impaired Assets:

1. Transparent recognition of impaired assets.

2. Decide on viability or otherwise of restructuring within a period of 90 days. 

3. Encourage one time settlements for all retail exposures (upto Rs.7.5 cr)

4. File applications before NCLT for resolution/liquidation within six months from the date of default.

5. Identify stressed assets in all segments and rehabilitate viable ones, even if it involves down gradation of asset.

6. Involve operating and local staff in recovery of retail assets.

In addition to the above, to attain self reliance, the banker need to improve on the following areas.

a. Prevention of frauds: Ensuring end use of funds is vital. Within a month from date of disbursal there should be system in place for ascertaining whether the utilisation is in line with stated purpose. 

  Fraud Detection: Time lag between happening, detection and declaration should be defined and should not exceed three months. 

E  Engage with the society through the various activities initiated by the government, like activating  PMJDY portfolio, KCC cards, popularising social securityschemes like suraksha bhima/jeevan jyothi yojanas, NPS among the depositors, etc. 

   V. Viswanathan 

      31st July 2021. 

  The contents under roles of various stake holders to make PSBs Vibrant are in line with the second part of my speech on 20.07.2021 in the webinar organised by AIBEA under the banner "Vibrant Banking for Vibrant India"

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