Has The Banking And Finance Sector In India Finally Initiated A Turnaround?
Last week, the Government announced the consolidation of 27 Government banks into 12 in order to strengthen the banking sector, struggling under a mountain of debt as well as to ensure robust balance sheets that can lead to credit growth in the economy. In August 2019, the Finance Minister had also announced that the centre will front-load its Rs.70,000 crore capital infusion into public sector banks to encourage additional lending of Rs. 5 trillion.
Already, the Government had infused more than Rs. 1 trillion in public sector banks in FY-2019 with the last tranche of Rs. 48,239 crore in February. The financial support is not limited only to the banks but extends to the beleaguered housing finance sector as well, which has been committed a total of Rs. 30,000 crore.
What have all these infusions really meant for the financial sector in India?
Have The Infusions Helped?
In the last six years, the Government pumped Rs. 3 trillion into state-run banks that helped them reduce losses but failed to boost credit, according to an India Ratings report. A good portion of these funds came from the state-run Life Insurance Corporation of India (LIC), thus doubling the value of the Government’s stake to Rs. 4.4 trillion as of July 2019, from Rs. 2.2 trillion in March 2014.
Only in FY-2019 and FY-2018 did the bank credit experience double-digit growth – 13.24% in FY-2019 while in FY-2017, credit supply was at a five decade low of 4.6%. This means that the capital infused was largely consumed to tide over losses resulting from provisions required on non-performing assets. Thanks to the infusions, Bank of India, Corporation Bank, Allahabad Bank, Bank of Maharashtra and Oriental Bank of Commerce were taken out of the RBI’s Prompt Corrective Action (PCA) framework.
Over the last few years, market share of state-run banks in incremental credit generation shifted to other market participants including private banks, foreign banks, non-bank financial companies, housing finance companies and mutual funds.
The market share of these banks fell to 46.5% in FY-2019 from 60.9 per cent in FY-2014. In terms of incremental credit, their share has been 26.2% over FY-2014 to FY-2019. The agency report also pointed out that the capital infusion by the Government may ensure bank’s solvency but may not necessarily ensure stability and growth in the absence of non-financial and structural reforms.
Consolidation In The Banking Sector
The stock markets gave thumbs down to the Government’s announcement of the merging of 10 state-run banks into four. Shares of Canara Bank dropped 10.59%, Union Bank of India fell 9.08%, Punjab National Bank plunged 8.55%, Oriental Bank of Commerce dived by 8.1% and Allahabad Bank dropped 5.67% on the Bombay Stock Exchange. Corporation Bank fell 3.98%, while Syndicate Bank dropped 1.08%.
A report by Centrum Broking Research stated that mergers such as these will face near-term challenges such as integration of processes, human resources, branch network rationalization and consolidation of financials. Given the poor health of state-run banks, it will take them a while to realize the benefits of the merger.
Also, given the amount of funds that have already been invested in the banks, there is a strong possibility that more funds will be required after the merger particularly since all the previous fund infusions have been utilized to emerge from losses.
Where Is The Reform?
In a talk in Mumbai, banker Uday Kotak suggested the re-introduction of the controversial Financial Resolution and Deposit Insurance (FRDI) bill to tackle the problems in the financial sector. He also recommended setting up a stronger Financial Sector Development Council for inter-regulatory issues with the finance minister as the arbiter. Other financial sector experts have echoed his views particularly around creating a legal framework for the orderly resolution of failing financial firms.
Most experts agree that simply infusing funds in the banking sector will not help and these need to be accompanies by a comprehensive reform package that is utterly missing. In the absence of this, it remains to be seen how the bank consolidation move by Government pans out in the long run.
What Experts Have Said About The Finance Sector In India
Speaking to financial expert Mr. Amit Pandey, who’s a Partner at Coinmen Capital Advisors, we understood his opinion on how he feels the announced changes can impact the economy and what other measure could be taken to restore balance in the financial sector in India.
Mr. Pandey said, “While infusion of capital was intended to give a boost to lending and improve capital availability with lenders, there haven’t been many takers. The simple reason is lack of confidence and uncertainty which has crept in the minds of entrepreneurs as well as lenders.
The cascading effects of one sector’s underperformance is clearly visible now in other sectors and it has even started to penetrate down to consumer credit. Of course, this is not a surprise and is expected when the economy is on a downturn. The several recent announcements from the Government are also not helping the credit offtake since capital formation/fresh capex is not there to be seen at all.
With a tough set of RBI restrictions on refinancing of loans and a stiff economy which right now demands a lot of fiscal prudence, businessmen are focusing on de-leveraging and looking for options to reduce the cost of debt rather than investing in new projects.
Even the rate cuts which ideally should have spurred credit demand and boosted investments are instead seen as a window for rate reduction on existing debt rather than new capex loans. In a nutshell, no visible improvement is seen in the and the announcement of bank consolidation at this juncture is a dampener.
RBI probably needs to permit one-time restructuring of loans, reduce risk weight for NBFCs (other than HFCs also), consider RERA registered real estate projects with more than 70-75% construction done in a special window for financing by banks/NBFCs. With such moves, we may see signs of revival by the end of this financial year.”
With the suggested reforms for the finance sector in India, plenty of short-term moves proposed by the Government and an economy which is trying to revive itself in the 5th gear, will we see a quick turnaround?