RBI released an interesting Table in its third quarter 2012-13 monetary policy review. Table 1 shows that PSU banks have been the worst performers in the NPA front and their capital adequacy has actually gone down in the June to September 2012 period. The other bad performer is the old private sector bank category that has seen slippages in its bad loans and capital adequacy.
RBI has now released draft guidelines on provisioning norms for restructured standard assets and this will hit PSU banks hard. Banks will have to make provision of 5% on restructured standard assets starting April 2013 if the draft guidelines are accepted. The current provisioning norm is 2.75% for restructured standard assets.
PSU banks have the highest ratio of restructured standard assets to gross advances with the ratio being 7.34% as of September 2012. The ratio for PSU banks stood at 6.67% as of June 2012 indicating that more assets are being structured every quarter. The ratio could go up if more real estate firms default on loans. The 37% fall in real estate firm HDIL stock price in the week before last is an indicator of market perception of debt levels of leveraged real estate companies.
The fact that PSU banks are seeing the worst of the bad loan problems raises many questions on the way the banks are being run. The government ownership of the banks does not lend them much credibility in terms of managing risks. Issues of crony capitalism also comes into play while issues of directed lending to problem ridden state electricity boards also affects the risk management credibility of PSU banks.
The government has to appoint the right professionals to manage PSU banks and maintain arms length distance in their functioning. This move will then add credibility to the perception of PSU banks in the eyes of investors and rating agencies.
The government is trying to push RBI in giving out new banking licenses with daily media reports on what kind of corporates can be given bank licenses. The fact that the government is getting involved in new bank licenses at a time when its own banks are showing the worst performance in the banking sector leads to serious questions on the intentions of the government. RBI will only give out a few licenses based on merits but given the government involvement there will be raised eyebrows on why certain corporates received licenses and certain corporates did not receive licenses.
RBI should hold back on bank licenses until the banking sector gets back on track with balance sheets improving. The government should lay off the RBI on the banking license issue. PSU banks are a bad enough example of the government’s involvement in the running of the banks. The economy certainly does not need fresh worries of crony capitalism when corporates are given bank licenses.