Concerns about the asset quality of public sector banks, reflected in non-perforimg assets (NPAs), were aggravated in the financial year ending March.
The gross NPA percentage of nationalised banks and the State Bank of India increased from 1.9 per cent and 3.3 per cent in March 2011 to 2.5 per cent and 4.4 per cent, respectively, in March this year. A recent speech by an RBI Deputy Governor K.C. Chakraborty highlights the dubious asset quality of public sector banks (PSBs) on account of the dramatic rise in loans restructured in 2011-12. The restructured advances of PSBs rose by 48 per cent, taking the share of restructured advances as proportion of gross advances to 5.73 per cent in 2011-12.
In comparison, private sector banks, both old and new, reported fewer loans under restructuring. For private sector banks as group, the share of restructured advances was 1.6 per cent. As PSBs account for 75 per cent of the banking business, the rise in restructured advances in their case was reflected in the numbers for the banking system as a whole.
Why only PSBs?
The restructured loans are potential NPAs and hence, a cause of concern. Analysts of banking stocks consider both the declared NPAs and restructured advances to comment on the health of banks.
Comparing the restructured advances of various bank groups, the Deputy Governor surmised that the problem could not merely be put down to the general economic slowdown; this was because some bank groups, in fact, did not have a serious problem on the restructuring front.
Why is the restructuring problem specific to PSBs? The reasons cited by Chakraborty include aggressive expansion by some borrowers during the boom period, deficiencies in project appraisal, and banks being rather active in accommodating requests for restructuring.
Portfolio Imbalance
There is another major reason — their loan composition. Unlike in the case of private banks, big-ticket corporate loans form a larger share of the credit portfolio for PSBs. Restructured loans to medium and large industries accounted for 9.3 per cent of the advances made to them in 2011-12. The proportion of restructured loans in a sector as compared with the gross advances made to the sector is the highest in the case of medium and large industry. And, advances to large industry account for at least 45-50 per cent of total gross advances. Why do PSBs seem to lend disproportionately large sums to big corporates?
Lending to large corporates helps PSBs report better business growth, without taking the tedious but more rewarding route of involving the branches. However, such lending often is done on a wafer-thin margin, which ultimately affects profitability.
Moreover, in times of economic slowdown, one large account going bad adversely affects the asset quality parameters of the bank. Thus, PSBs are often forced to walk that extra mile to accommodate the corporate in the interest of their own financial health.
If PSBs are interested in good and sustained all-round performance, they would have to take the difficult route of involving the branches in creating a diversified loan portfolio.
Recently, the Finance Ministry was reported to have asked the PSBs to reduce the share of bulk loans in their asset portfolios. Though the intrusion by the Ministry in the affairs of the banks is uncalled for in most instances, in this case perhaps such a directive was long overdue.
This would possibly prompt PSBs to rethink their business strategy. A larger share of retail loans in the overall basket leads to diversification of risk and better margins. Despite the sensitisation efforts in this direction, it would be difficult for PSBs to change the composition of their loan portfolios towards retail loans quickly.
This is because unlike their private counterparts, PSBs have to deal with challenges that come with big size. The SBI has a larger share of banking business in the country than the combined share of all new private sector banks. It is more difficult to change the direction of a ship than a car. In addition, there are legacy issues.
Can CDR Help?
Corporate debt restructuring (CDR) is an institutional mechanism for restructuring large loans involving more than one bank under consortium arrangement. The CDR mechanism was devised to support large, viable accounts facing temporary problems, and preserve the values of large exposures of banks.
The provision that banks can treat these loans as standard assets has created a moral hazard problem and encouraged them to encourage CDRs, rather than exercise due diligence before sanctioning loans, monitoring loans, and taking prompt corrective action at the first signs of weakness.
In an ideal situation, CDRs should call for sacrifices by both borrowers and lenders. While the promoters of the borrowing concern are expected to increase their stake in the form of guarantees and equity, the banks should make provisions for diminution in fair value. Both banks and promoters tend to avoid the sacrifices which CDR should invoke. There is an urgent need to revisit the entire approach to CDR and plug loopholes.
Traditionally, the PSBs have been more focused on growth than profitability and efficiency. With banking sector reforms and greater market orientation of the banks, it was expected that PSBs would accord bottom line and growth equal importance. To make the most of available opportunities, PSBs should desist from focusing on a few big corporates. They should look for broad-based business growth — and not merely persist with easy options.
(The author is Associate Dean, Xavier Institute of Management, Bhubaneswar. Views are personal.)