Banking Downgrade

Why this is a telling indictment of PSU Banks…

In a sudden move, the rating agency CRISIL has downgraded 8 banks over asset quality issues. Of course, the issue of asset quality was always there and what this downgrade has done is to highlight the more vulnerable among the PSU banks. The 8 banks whose debt has been downgraded include Andhra Bank, Bank of Baroda, Bank of India, Canara Bank, Central Bank, Corporation Bank, Dena Bank and IDBI Bank. In these cases, it is not just about the quantum of NPAs but the concern is also about the slippages in NPAs. Additionally, the pressure on earnings is also likely to remain high and interest spreads are likely to compress further.

A rising wave of NPAs… 

The statistics are quite telling. According to CRISIL, the weak assets of the banking system are likely to rise 75% from Rs.400,000 crore in March 2015 to Rs.700,000 crore in 2017. This will result in the weak assets ratio going up sharply from 7.2% to 11.3%. Most of these NPAs are coming from stressed sectors like steel, power and infrastructure. In these sectors there is no immediate visibility of any recovery, which could only worsen the problem for these banks.

A hit on their profits…

CRISIL has estimated that most of these banks could actually slip into full year losses and these losses could only deepen in the coming year. That is not great news for these PSU banks as they are supposed to hit the IPO markets this year. While the falling yields may be some respite for the bond books of banks, the major issue is profitability in the next few quarters.

The road ahead for smaller banks…

One of the enduring themes coming out of the Gyan Sangam was that small and medium banks need to merge with the larger ones. For example, when banks were nationalized it created a lot of surplus capacity serving the same markets. With the advent of private banks and now with the introduction of payment banks, a large part of the network of these PSU banks has become redundant. With their mounting NPAs, weak credit profile and falling profits they will not be in a position to sustain such vast banking networks.

The imperative in front of the government will be three-fold. Firstly, they need to work out how to leverage on the undervalued assets of these banks. Then a decision will have to be taken on a strategic sale versus merger. Secondly, the government must ready its strategic sale model quickly. Lastly, in case of bank mergers, the government must prepare to deal with rationalization of branches and costs. That is the message of the CRISIL downgrade. Time is running out for PSU banks and it’s now time for action. ©

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