Who Wants To Be A Banker?

A banker is a fellow who lends you his umbrella when it’s sunny and wants it back when it rains”. Mark Twain, the American author and humourist’s pithy observation suggests bankers are an irrational, mercurial tribe. Not really! It’s perfectly sensible for you — banker or not — to want your umbrella back when it starts to pour.

For some time now, bankers have been out to do so; they have been wet and out in the cold for far too long that some suffer from a bad bout of pneumonia. There’s only one way to describe fiscal 2015 for them — annus horribilis. The expression is in Latin, but what was spoken between bankers and India Inc., for the most part, was Greek to both. We will come to it in a bit, but first: the quicksand banks were caught in the fiscal gone by (and will continue to be in for a while).
Bank balance sheets shrunk, a trend that’s been on since 2011-12. On the credit side, it was reflective of the fall in industrial growth, poor earnings reported by clients, a flight to safety on the part of banks given the uptick in dud-loans and governance concerns. If you were to look at it bank-group wise, state-run banks did not grow their books, but private and a few foreign banks (the stable among the full-service players and a few niche, wholesale players among them) did show an appetite for credit — on a selective basis that is. At the industry level, it’s what state-run banks do or don’t that matters — they account for 76 per cent of the business.

As for the better borrowers, we saw that banks were not the only lenders in town for them. A few went over to other windows to avail of finance — cross-border loans, corporate bonds and commercial papers. It’s a clear enough indication that a decade down the line, we will see more of what’s par for the course in the matured financial markets — disintermediation in its truest sense; bank loans will not be sole financier of the corporate world. In our case, this shift will also be catalysed, in part, by the fact that state-run banks which have the lion’s share of the credit market as on date may not be in a position to lend as liberally as they did in the past as capital will quote at a huge premium. In any case, fiscal 2017 may see the cumulative net-profit of private (and foreign banks) at a higher level than that of state-run banks; it will be clear at end-September 2016. It means they will be able to pull in more of the capital on offer as investors will indulge them; not state-run banks.

We also saw a divergent trend in liabilities and assets of banks. In the former, those of shorter duration fell, the longer were up. It was exactly the opposite in the latter, marginally though. It says a lot about the chronic risk-aversion at the systemic level — to take on fresh exposures. This trend may well cement itself; and hasten the process toward the way credit is disintermediated.

Will the Mood Change?
What’s clear is the baton changeover at the Centre after the May 2014 verdict at the hustings has not ushered in a new tide to be taken at the flood that was to lead to a fortune. The hope was misplaced, romantic to begin with in the first place. It did not help that NDA II on its part raised it with its brand of pulpit-rhetoric in its election campaign. The legacy of the UPA II’s last few years in power (policy paralysis, next to nothing by way of investments and a gravy train for graft) has taken a severe toll. You also had a few rotten apples who took banks for a bumpy ride — it happens anyway. Now while some bank managements may have been complicit in a few such cases, what you can’t get away from is there are no quick-fixes to set things right. Banks have been singed badly; let’s look at their clients now.

The Reserve Bank of India’s Financial Stability Report (FSR-December 2015) analysis of the performance of the corporate sector using select non-government non-financial (NGNF) firms for the period 2010-11 to 2015-16 shows after a slump in the first quarter of 2015-16, key ratios like operating profit, EBITDA, net profit and the interest coverage ratio (ICR) shone brighter in the second quarter. The profitability of NGNF-listed firms, which fell in the second half of 2014-15, picked up a tad in the first half of 2015-16; the solvency ratio was much better. Debt-servicing capacity, measured by the ICR, also improved in the period, but corporate leverage (debt-to-equity ratio or DER) stood at the same level during September 2014-2015. But don’t cheer yet.

The share of firms in the sample (either with a negative net worth or DER>=2 termed as ‘leveraged’ companies) went up over the last three-and-half years to 19.4 per cent in September 2015 (18.4 per cent a year earlier); their share of total debt fell marginally to 30.5 per cent in September 2015 (31.8 per cent). As for the proportion of the leveraged firms with DER>=3 (termed as ‘highly” so), it went up to 15.3 per cent (13.6 per cent) while their share of debt (of total debt) rose to 24.9 per cent (22.per cent). It tells you that India Inc’s books are still in a bind.

Now look at what has happened on the dud-loan side. Gross non-performing advances (GNPA) rose to 5.1 per cent from 4.6 per cent between March and September 2015. Net non-performing advances (NNPAs) went up to 2.8 per cent (2.5 per cent). At the bank-group level, the NNPA ratio of state-run banks were up at 3.6 per cent (3.2 per cent); the same for private and foreign banks held at 0.9 per cent and 0.5 per cent levels, respectively. The “restructured standard advances” fell to 6.2 per cent (6.4 per cent); the “stressed advances” ratio went up to 11.3 per cent (11.1 per cent). State-run banks had the highest level of stressed assets at 14.1 per cent; then came private banks (4.6 per cent), and foreign banks (3.4 per cent).

What are the takeaways here? Dud-loan pressure will continue. It needs to be borne in mind that its relatively higher share (in the case of some banks) of advances might be attributed to lacklustre credit growth (and therefore, the percentage of dud-loan figure is up), it’s not yet clear what the slippages in fresh loans (given out during the last couple of years) are. You hear whispers that this can’t be ruled out; some bankers estimate this to be a good 30 per cent more.
As to why dud loans linger, there’s something to be said about the way bank “consortium discipline” is being “torpedoed” from within. In private, bankers say it’s loaded toward the larger lenders — 75 per cent in value have to agree to any decision; it loads the dice in favour of those with a bigger exposure to a borrower. It leads to perverse logic — some of the smaller, more prudent banks are at the mercy or worse, some expect larger state-run banks to “take decisions” for all in the consortium. There’s a good enough case for Mint Road to relook at this rule which ironically was imposed to give banks with more skin in the game to have a bigger voice! If that’s not bad enough, you also have strange cases of banks within a consortia taking diametrically opposite views on provisioning for a bad credit. Then you have the pressure on capital for state-run banks ahead of Basel-III which kicks in from fiscal 2019. Just how much of the capital given to them this fiscal will be used towards provisioning will be clear only sometime down the line. What will be closely watched is how the dud-loan issue will be tackled through the Bankruptcy Code. A mood-change in the economy will help, but we are far away from “animal spirits” being the order of the day. Until then, it’s reasonable to assume banks will be a wary lot.

Who wants to be a banker? It’s a tough call, but do take care of your umbrella if you decide to be one — only then shall the twain meet!

Raghu.moh@gmail.com
@tabonyou

(This story was published in BW | Businessworld Issue Dated 08-02-2016)