Dilemma of Public Sector Banks' CEOs
Tilak Raj Gulati
During a recent meeting with bank's Chief Executive Officers, RBI Governor Raghuram Rajan impressed upon strengthening the balance sheets of banks by March 2017. The big task before the present day CEOs of banks (particularly public sector banks) is to reduce the level of stressed assets (non performing assets + restructured assets), by way of recovery in stressed assets and/or by increasing the good credit portfolio. Let's understand how much feasible it is:-
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1. CAPITAL:- Banks have to maintain Capital Adequacy Ratio which is a certain percentage of risk based assets of the banks. Under BASEL III, presently a scheduled commercial bank has to keep 9% capital of its total risk weighted assets. Different types of loans have been assigned different risk weights, e.g., loan against security of fixed deposit is assigned 0% risk weight whereas Commercial Real Estate is assigned 100% and the Consumer credit carries 125% risk weight. The higher the risk weight attached to a loan, the higher will be the interest income to the bank and at the same time higher will be chances of delinquencies. In public sector banks, government is the major share holder and it is neither divesting its equity to enable banks raise funds from market, nor infusing adequate capital. Banks are constrained to play within limited boundaries.
2. LOW COST DEPOSITS:-To increase the credit portfolio, banks require deposits.
The more low cost deposits banks mobilise, the better margin of profit they can enjoy
by giving loans. In banking parlance, CASA (current accounts savings accounts) is
the low cost deposits. Over the years, banks have been vying for CASA, but with the
granting of licences to Payment Banks by RBI and the advent of numerous digital
wallets, banks may be denied the privilege of keeping CASA with them. It is time for
banks to devise innovative ways in tune with New Banking Paradigm to increase
profitability. SBI has launched a mobile wallet and also tied up with Rel Jio
for the payment bank. (Profits are also a source of increasing Capital base,
since banks retain major portion of their profits after distributing dividends).
4. IDENTIFICATION OF BORROWERS:- Even if banks get capital and mobilise deposits, the problem is whom to give loans. Presently, infrastructure , steel & aluminium and commercial real estate sectors are under stress. Manufacturing is not picking up. Past experience of delinquencies and recoveries shows that NBFCs, Micro Finance Institutions and Private banks are more equipped to give retail and small loans than the public sector banks.
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The dilemma before CEOs of public sector banks is how to save banks and come out of present day imbroglio. RBI Governor has impressed upon strengthening the balance sheets of banks. This is possible by making provision for the stressed accounts and also by putting some of these assets back on track. Certain suggestions are as below:-
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The author can be reached at:
Tilak Gulati, Assistant General Manager, UCO Bank.
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