Banking In 2018
The last three years have been quite revealing for the banking sector which has led to several corrections that will hopefully strengthen the financial system. The story started with the asset recognition norms being put in 2015 which should ideally have been spotted by the auditors. Similarly, the sudden recognition of restructured assets being camouflaged NPAs corrected an error which was in place. With this work being done what can one expect in the coming year?
First, the end of new NPAs being recognised should be behind us by March. It was to have happened in 2016 which got prolonged to 2017 and, hopefully by March 2018 should be a thing of the past. Second, the capital that is required to put state-run banks back on their feet is now in place. Indradhanush spoke about it, which was followed by the more recent announcement of putting in Rs 2.11 lakh crore of which Rs 1.35 lakh crore of recap bonds are to come in, with Rs 80,000 crore coming in February - March with strings attached. This will improve the regulatory capital status of banks under PCA (prompt corrective action) and enable faster growth in credit for banks well capitalised.
Third, the government would have to decide on two bold measures against the screen of the general elections coming up in 2019. Will they be able to offload stake in state-run banks this year? While it will be a bold move, the timing will be important. The stock market has been quite munificent this year which had enabled the disinvestment programme to sail through. Will this be repeated in fiscal ’19? The second is bank mergers. While mergers are another way of camouflaging weakness by horizontal summation of balance sheets, the sticky issues pertain more to the challenges of rationalisation of staff and branches.
On the operational side, one can conjecture that the Reserve Bank of India will not be lowering interest rates for sure. Inflation has been in the five per cent range and the possibility of an increase looks more likely depending on the oil-price trajectory. The last three years have been happy ones where good monsoons and low oil prices kept everything in check, which vindicated the stance of the Monetary Policy Committee that four per cent target was reasonable even though the last ten years’ data prior to the formation of this committee showed that inflation was above five per cent in nine of the ten years. Therefore, potential borrowers would have to be cautious on this score.
Second, the overall demand for credit would still be subdued for two reasons. As the Insolvency and Bankruptcy Code has not yet resolved any of the initial cases and there are others lined up, the larger companies who are in this circle are also big borrowers in the system will stay away for some time. To the extent that there is a pickup in demand for credit, companies would prefer to move to the market and both the corporate debt market and commercial paper market can expect to witness some momentum.
Third, on the demand side, banks have to reconsider the conundrum of maintaining lower deposit rates and higher spreads as this has caused a diversion to the mutual funds segment. Therefore, supply of funds will continue to be a challenge for them and has to be addressed by the system.
On the whole 2018-19 will be a year in which the banking system will have to get back on its feet despite all the aches and pains while the doctors (government and regulators) take a call on the structures that will be maintained.
