Chasing The Rainbow: Rehauling The State-run Banks

<div><em>North Block’s strategy to rehaul the affairs at state-run banks is commendable, but execution will be the key, says <strong>Raghu Mohan</strong></em></div><div>&nbsp;</div><div><table align="left" border="0" cellpadding="2" cellspacing="2" style="width: 200px"><tbody><tr><td><img alt="" src="http://bw-image.s3.amazonaws.com/Raghu-Mohan-mdm.jpg" style="width: 200px; height: 200px; margin: 1px; float: left;"></td></tr><tr><td><strong>Raghu Mohan</strong></td></tr></tbody></table>The first step came almost a week ago when it was announced that the Centre will infuse Rs 25,000 crore each during fiscal’s 2016 and 2017; and Rs 10,000 crore each over the next two fiscals. Last week (Friday), it said that the infusion of Rs 20,088 crore into thirteen state-run banks will be done in a month's time with the State Bank of India guzzling Rs 5,531 crore. The urgency is reflective of the precarious situation at several of these banks which are capital deficit ahead of Basel-III implementation which kicks in from fiscal 2019.</div><div>&nbsp;</div><div>Ananda Bhoumik, Managing Director &amp; Chief Analytical Office, India Ratings &amp; Research points out that while most state-run banks will be relieved at the end to uncertainty on the government's contribution, these banks will need to raise an additional Rs 15,000 crore from the equity market together with Rs 40,000 crore in bonds (additional tier-1 bonds) during the year.</div><div>&nbsp;</div><div>“In addition, our research suggests provisioning gap due to overleverage in distressed corporates, which may need to be filled in by equity. It is, therefore, imperative for these banks to improve performance and market valuations”, says Bhoumik.</div><div>&nbsp;</div><div>The issue of distressed assets in banks can’t be taken care of by mere provisioning – that's &nbsp;mere accounting for bad debts. To get back these assets in to “working” mode much more needs to be in the realm outside banking at the policy implementation level – they pertain to fuel supply, the poor state of discom’s financial health; and issues akin in aviation, steel and infrastructure. Until, these bottlenecks are resolved, recapitalising banks may turn out to be an exercise that throws good money after bad.</div><div>&nbsp;</div><div>Mint Road’s estimates had put the total amount of capital – equity and non-equity – for Basel III at closer to Rs 5 lakh crore; it is a dynamic numbers and depends on a whole range of factors – credit growth, dud loan provisioning and the technicalities under Basel III.</div><div>&nbsp;</div><div>Raman Uberoi, Business Head-CRISIL Ratings (Large Corporates) qualifies that “success will depend on relentless implementation, and staying the course no matter the obstacles. What’s encouraging is that the government has hit the ground running”.</div><div>&nbsp;</div><div>It was pointed out that conceptually, Indradhanush takes cognisance of both internal and external factors that influence the performance of state-run banks. The internal ones are better governance, greater efficiencies and a performance evaluation framework that incentivises management focus on capital conservation and credit rating. The external factors are linked to legal, recovery and dispute resolutions such as coercing promoters to sell non-core assets, setting up fraud resolution processes and six new Debt Recovery Tribunals, and enhancing the role of asset reconstruction companies.</div><div>&nbsp;</div><div>“We believe the clear timeline given for the setting up of a Bank Board Bureau and the announcement inducting professionals as non-executive chairmen will eventually drive qualitative changes in governance, strategy formulation, capital efficiency, and human resource practices. And allowing bonus and stock options for senior management will make public sector banks competitive and go a long way in attracting right talent”, adds Uberoi.</div><div>&nbsp;</div><div>The steps announded by the Centre is a summation of what has been articulated over time; just that it has been put in a neat capsule. On &nbsp;paper, Indradhanush looks as impressive as a rainbow; but it all depends on execution. A failure here can make it a rainbow chasing effort!<br><br><div><em>P.S.</em> Mission Indradhanush was to immunise kids against seven vaccine-preventable diseases. The latest one is to immunise banks!&nbsp;</div><div>&nbsp;</div></div>