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United Bank of India will not be able to expand its loan book till fresh capital is infused as its capital adequacy ratio has dropped to about 9%, the floor level. The Reserve Bank of India (RBI) had ordered a forensic audit of the state-run bank’s books a few months ago and restrained its management from giving loans of over Rs.10 crore after the Kolkata-based lender announced a Rs.438 crore loss and a 50% jump in gross bad loans for the September quarter. Its health deteriorated further in the December quarter, with gross bad assets crossing Rs.8,500 crore and touching 10.82% of advances. Its net loss in the December quarter was Rs.1,238.08 crore as it had to set aside a hefty amount to take care of the rising bad loans.
A few other public sector banks too could be asked to go slow in giving loans as the banking regulator is not comfortable with the rise in their bad loans. RBI suspects that the actual quantum of bad assets in these banks is higher than what they have been announcing.
If indeed that happens, pressure on other banks will mount as borrowers will knock at their doors. Year-on-year credit growth for the banking industry at end-January was 14.7% against 16% a year ago. If a few banks are restrained from giving loans, others will have to step in to meet the demand of the borrowers.
The larger issue is the capital need of Indian banks. The government has made a budgetary provision of Rs.14,000 crore in the current fiscal year to recapitalize public-sector banks. United Bank of India got some money in December but now needs much more. There is a technical issue involved in the recapitalization of this bank, in which the government’s stake is pegged at 88%. Since under norms the government must hold at least 10% in state-run companies, there is little scope for the government to infuse more capital in United Bank of India as its stake will go beyond the threshold level. Of course, a government-owned institution such as Life Insurance Corp. of India (LIC) can infuse money. LIC holds 3.1% in the bank and the overall institutional holding is around 5.5%.
The combination of bad loans and restructured loans of the banking industry now exceeds 10% of their loans. In absolute terms, the amount will be aroundRs.5.8 trillion as the total loans of the banking industry at end-January was close to Rs.58 trillion. This is slightly less than equity capital and reserves of the entire banking system—around Rs.6.03 trillion for the fiscal year 2013. This means if these bad and restructured loans all turn into loss assets and the banks are required to provide for them, the net worth of the entire banking system will be wiped out. This will never be the case as most bad loans are cyclical and once the growth momentum returns to the economy, borrowers will be in a better position to service their loans. And typically, not more than one-third of the restructured assets turns bad; hence, there is not much worry on that front.
However, one also needs to take into account the fact that the actual bad loans could be higher than the declared figures. In that case, the capital issue is much more critical than what we think. Besides, if the economy continues to remain on the slow growth path for a few more quarters, then the cyclical problem of piling of bad assets could become a structural issue and lead to systematic instability.
Where will the capital come from? The latest equity issue of State Bank of India made it abundantly clear that there are not too many takers for Indian banks’ equity. LIC bought 41.3% of the total shares that State Bank sold on 29 January as part of its qualified institutional placement offering. Following this, LIC’s share in State Bank rose to 14.99% from 12.15% earlier. State Bank sought to raise Rs.9,600 crore via a share sale to institutional investors in the domestic market, but could raise only Rs.8,032 crore as foreign investors largely stayed away from the offering. If the nation’s largest lender faces such muted response from investors, one can imagine how other banks would fare in raising equity.
This means the government will have to continue to pump in taxpayers’ money in banks and the pressure on the fisc will remain. Currently, government stake in public sector banks varies between 88.93% (in Central Bank of India) and 58.9% (in Allahabad Bank). Under norms, the government stake cannot fall below 51% in these banks. If the government does not want to lose its hold, it can retain its majority stake in the top six public banks and recapitalize them using the money generated by selling its stake in other banks. It can always bring down its stake in relatively smaller banks to 26% and continue to have the power to block any special resolution. The shares can be sold in the market at an appropriate time when there are takers for such shares.
India’s top six state-run banks—State Bank, Bank of Baroda, Bank of India,Punjab National Bank, Canara Bank and Union Bank of India—together account for about 44% of the country’s banking assets. If the government keeps its majority stake in these banks and pares its stake to 26% in other listed banks, at their current market prices, this will generate a little more thanRs.32,000 crore. This can take care of the capital requirement of the top half a dozen banks for two years. The fisc will be spared for two years and, by that time, the top six public sector banks can gather resilience to fend for their own.
Tamal Bandyopadhyay keeps a close eye on everything banking from his perch as Mint’s deputy managing editor in Mumbai. He is also the author of A Bank for the Buck, a book on HDFC Bank.
