Can the frontloading of Rs 70,000 crore capital into PSBs and other measures boost banks and NBFCs?

BL Research Bureau

At first glance, the finance minister, Nirmala Sitharaman’s announcements to boost the economy and the financial sector, has hit all the right chords on the optics. From frontloading capital infusion into PSBs, seeking to channel additional liquidity into cash-starved NBFCs/HFCs, one-time settlement for MSMEs and speeding up decision-making at PSBs-- the announcements have certainly lifted the sentiment and kindled hopes of more reforms on the anvil.

But are they enough to pull public sector banks and NBFCs out of their gloom and kick-start lending?

Well sure, front-loading capital infusion of Rs 70,000 crore can help pull some weak banks out of the RBI’s prompt corrective action framework (PCA) and has the potential to expand credit, but that alone may not be enough to deliver the goods. The performance of banks in the latest June quarter-- rise in slippages and stressed book, weak core performance and low NPA recoveries-- suggest that much of the capital infused by the Centre could again go into provisioning in the coming quarters, and not necessarily to fund credit growth. Also the manner in which the capital is allocated to the PSBs will be critical as Tier 1 capital of few banks are already below the regulatory requirement.

What’s more while the finance minister has sought to abate the fear of vigilance enquiries to speed up decision making by bankers, it is unclear if banks would immediately start lending to industry and riskier segments. Many of the measures that the Centre and the RBI announced recently, have only led banks to chase more consumer loans.

Boosting credit growth to industry still languishing in single-digits, will be key to revive the investment activity in the economy.

Fund growth?

The Centre’s decision to frontload capital infusion into PSBs, can achieve two things. One, it helps banks better manage their capital needs for the year. Depending on the level of stress and capital position, each bank can decide on the amount they want to lend for the year. Also, given that the Centre is the major shareholder in PSBs and has brought in capital, the banks can now plan other fund-raising activities such as qualified institutional placements (QIPs) going ahead.

But these are easier said than done. For one, the stress in banks is not easing up anytime soon and hence the uncertainty over NPA provisioning will continue to keep banks away from lending to riskier segments.

Despite the massive Rs 1.9 lakh crore of capital infused into PSBs in the last two fiscals, credit growth for PSBs, remained in single-digits. In the latest June quarter too, credit growth for PSU Banks have remained at modest 7-8 per cent. While the headline bad loan numbers have declined by about 5 per cent YoY, they have inched up sequentially, when compared to the March quarter. Elevated slippages and slow resolution of large accounts under IBC are likely to keep earnings under pressure in the coming quarters as well.

How will it be allocated?

Few banks are just about meeting their capital requirement. The Tier 1 Capital ratio for banks such as IOB, Central Bank of India and PNB are about 7.6 per cent, below the regulatory requirement of 8.875 per cent. This brings us to the issue of how the Centre will allocate the capital this time around.

In FY18 when the first big bang recap of Rs 90,000 crore was announced, the Centre had bucketed banks into weaker (PCA) and stronger banks (non-PCA) banks---giving 40 per cent of the capital to the latter in a bid to revive credit growth. But in FY19, the entire capital was given only to ensure that many of the PSBs either don’t breach the PCA triggers or maintain minimum regulatory norms.

What will be the criteria to infuse the Rs 70,000 crore capital this time, to ensure that credit expands?

Given that larger and relatively stronger banks such as SBI and BOB have also been shying away from lending to riskier segments, how the Centre intends to fill the void in the credit demand of the economy, with capital infusion alone, needs to be seen.

As such bank credit growth has bounced back to double digit recently, led mostly by unsecured retail loans. The Centre’s latest announcements coupled with RBI’s reducing risk weights for consumer loans in its monetary policy will nudge banks to push more consumer loans. It is unclear how the credit growth to industry that continues to languish in single-digits, will revive.

Transmission push can hurt banks

After a lot of prodding, PSBs have started to lower their lending rates. The finance minister re-iterated that the banks’ move to lower MCLR and link loans to repo rate will bring down borrowing cost and boost lending.

True, after SBI taking the lead, many banks are looking to link their loans to repo rate to pass on the benefit of lower lending rates to borrowers. Consumer loans and working capital loans could pick up in the coming quarters. But this could also lead to earnings volatility for banks in the near term.

This is because, when lending rates are pegged to external benchmarks, it would imply faster reset of loan rates. This would mean that banks will have to create a portfolio of deposits and loans with a balanced mix across tenors such that the overall asset-liability gaps are managed well not only to reduce liquidity mismatches but also to mitigate earnings volatility.

Hence the Centre pushing adoption of external benchmarks for pricing loans can only hurt PSBs in the near term, already grappling with weak core earnings. While larger banks such as SBI and BOB can still weather the earnings pressure, smaller PSBs forced to toe the line can find it difficult.

As such, banks don’t appear to have much leeway on the deposit front. SBI had linked its savings deposit rates to repo rate, which could have helped it ease the pain, as some part of its deposits would have also been re-priced with every RBI’s action. But recently, SBI decided to bear the burden and not lower rates on its savings deposits in the interest of depositors. Such flip-flops only increase the uncertainty of the sustainability of loans linked to external benchmarks.

MSME’s gain, banks’ loss?

There has been a lot of focus on reviving MSMEs. The recent announcements also include a one-time settlement policy for MSMEs. While this is welcome for MSMEs, it could hurt banks.

In January, the RBI had allowed a one-time restructuring of existing loans to MSMEs (exposure not exceeding Rs 25 crore). There are already concerns over how this will impact PSU Banks in the long run, as lack of proper due diligence and prudent restructuring can be disastrous later on.

The finance minister’s announcement of a one-time settlement policy for MSMEs could eat into banks’ capital because of the haircuts, banks would have to take. This could again lead to weaker capital position and lower funds to drive credit expansion.

Easing credit flow to NBFCs

The finance minister announcing additional liquidity support to HFCs-- increasing funds to NHB for refinance facility from Rs 10,000 crore to Rs 30,000 crore---is welcome. Measures to alleviate home buyers' problems are expected next week, which could also boost the real estate.

On the NBFC front, the finance minister re-iterated its commitment on the partial credit guarantee scheme and also pinned its hopes on co-origination between PSBs and NBFCs gaining pace.

The Budget had proposed that for purchase of high-rated pooled assets of financially sound NBFCs, amounting to Rs 1 lakh crore, government will provide one time six months' partial credit guarantee (PCG) to PSU Banks for first loss of up to 10 per cent. The RBI had also laid down framework for co-origination of loans by banks and NBFCs for lending to the priority sector, nearly a year back. Banks such as SBI have been working at inking agreements with NBFCs.

Several measures taken by the RBI and the Centre over the past year have been aimed at resolving the liquidity issue of NBFCs. But while these have helped ease flow of credit to NBFCs, they have only aided few NBFCs.

Going by the data put out by RBI, after growing by 27 per cent YoY in FY18, bank lending to NBFCs grew by a higher 29 per cent in FY19. As of June, the growth has been even higher at 37 per cent; yet the noise around the troubles of NBFC sector, has only grown louder.

This is because large NBFCs with sound backing and quality loan book have been able to raise funds from banks (maybe at a higher cost). The problem lies with funding NBFCs with high exposure to stressed segments such as real estate (developer segment), infrastructure and LAP.

Hence the key issue of channelling funds to cash-strapped NBFCs and improving the risk perception, may not be addressed in the near term. Of SBI’s exposure to housing finance companies, 70 per cent are those that are either backed by large private sector institutions or by PSUs. Only 30 per cent are ‘other private’ players. Of SBI’s exposure to other NBFCs other than housing finance, 46 per cent pertain to central and state government and those backed by PSUs, 36 per cent are backed by large private sector institutions; only 18 per cent are other private NBFC players.

Hence banks could continue to lend to good quality businesses.

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