Banking: Way To Go

Just how is one to view the world of state-run banks? They account for 76 per cent of the banking system’s assets, but from the second-half of fiscal’17, the cumulative net-profit of private and foreign banks will be higher than this lot. The message: you can tom-tom about the state-run nature and market share for all you want, but it’s the bottomline and valuations that matter.

Last week, R Gandhi, deputy governor of Reserve Bank of India (RBI) drew our attention to a nuance. State-run banks — with implicit government support — are seen as relatively immune to destabilising impacts, but “the same sense of safety evades these banks when it comes to their valuations”. Well, there’s a perception that the Centre will have to ration its budgetary support to these banks going ahead, but even then until they fundamentally change, it’s of no use.

It has implication on the ability of these banks to grow. Typically, credit growth is 1.3 times of GDP growth. “I have assumed 5 per cent inflation (all along) with real GDP rising to 9.5 per cent in the terminal year (2019). Based on this, banks will need incremental capital of Rs 5.4 lakh crore-6 lakh crore for four years; the state-run would need Rs 4 lakh crore-4.5 lakh crore or about Rs 1 lakh crore per annum,” says Madan Sabnavis, chief economist at Care Ratings.

The cumulative net-profit of these banks in the last two years was around Rs 35,000 crore-37,000 crore; it gets sucked into reserves. So they will need an additional Rs 60,000 crore through tier-2 bonds or fresh capital. “Even if these assumptions (on GDP) do not hold, and we move at 14 per cent growth in credit for the four-year period, they will need Rs 3 lakh crore-3.3 lakh crore; here too, they will require capitalisation support from the Centre,” adds Sabnavis.

Gandhi says with the Centre’s new performance-based norms for capital infusion, the disconnect between the stability and valuation of state-run banks is sought to be addressed. The move to link budgetary capital allocation with performance needs to be seen as a serious attempt to convey the right signals to all banks to introspect and, if necessary, redefine their business strategies.

“The frictions that hinder the performance of these banks need to be completely eliminated and they should be allowed to work on commercial principles even as the costs of social banking have to be provided for separately. If that is through budgetary support, the government may be more than compensated through increased revenues from and valuations of state-run banks,” says Gandhi.

Whether house-keeping follows capital infusion or vice-versa, Gandhi shows us the path: Perform or perish!