The Indradhanush plan and announcement of further recapitalisation are expected to significantly improve the capital position of public sector banks (PSBs), according to Reserve Bank’s report on trend and progress of banking.
PSBs were allowed to raise capital from the markets through ofllow-on Public Offers or Qualified Institutional Placement in August 2016. Further, the Centre has given in-principle approval for PSBs to amalgamate through an alternative mechanism. Any such proposal would be solely based on commercial considerations and will need to originate from the boards of respective banks.
MORE SOPHISTICATED TOOL
In view of testing of a minimum Tier-I leverage ratio of three per cent till 2017, the RBI has been monitoring individual banks against an indicative leverage ratio of 4.5 per cent. Implementation of the Liquidity Coverage Ration (LCR) was phased in at 60 per cent from January 1, 2015 to reach 100 per cent on January 1, 2019.
It is a more sophisticated tool than the statutory liquidity ratio (SLR) for liquidity risk management, since it takes into account the liquidity profile of both assets and liabilities. Currently, banks have to comply with both SLR and LCR regulations, but the SLR is being gradually brought down to facilitate a smooth transition to LCR reaching 100 per cent by January 1, 2019.
The progressive implementation of Basel III capital requirements has provided an impetus to scale up the capital to risk-weighted assets ratio (CRAR). Consequently, all categories of banks remained well above the requirement of 10.25 per cent (including the capital conservation buffer for March 2017 and 11.5 per cent for end-March 2019 when Basel III will be fully operational).
PSBs HAVE LOWEST CRAR
Among the bank groups, PSBs had the lowest CRAR although an improvement has become evident in recent years. Private banks have consistently maintained higher CRAR. Asset quality deteriorated further during 2016-17 with the gross non-performing assets ratio reaching 9.3 per cent of total advances. The ratio for PSBs rose to 11.7 per cent by March 2017.
A deterioration in the asset quality of banks adversely impacts their lending capacity, with downside risks to overall macroeconomic conditions. At the aggregate level, growth in non-food credit decelerated during 2016-17, extending a slowdown that commenced in 2015.
Credit to industries, which accounted for 38 per cent of total non-food credit, went into contraction. Within this category, the decline in credit to infrastructure was stark. Credit to the services sector, especially in the trade segment, picked up while that to agriculture and allied activities and personal loans experienced slower growth.
DEMO, RERA IMPACT
Housing loans, which account for more than half of the retail loan portfolio of banks, decelerated sharply, attributable to the transitory effects of demonetisation and uncertainty regarding the implementation of the Real Estate (Regulation and Development) Act.
Banks’ balance sheets were impacted by demonetisation, which led to a significant increase in low-cost deposits and a concomitant increase in liquidity, reducing their borrowing requirements.
In the face of low credit offtake, banks deployed resources in money market instruments and non-SLR investments. The off-balance sheet exposures of banks recovered from negative growth in the previous year.
Notwithstanding positive tail winds in the form of low-cost funds made available post-demonetisation, the financial performance, especially of PSBs, was weighed down by high provisioning on account of NPAs. As a result, PSBs reported net losses for the second year in a row.
In an environment characterised by slowing economic activity – mainly located in industry and subdued demand – the growth in consolidated balance sheet of banks moderated.
Credit growth fell to a record low of 2.8 per cent, pulled down by a persistent decline in asset quality, which necessitated a sharp increase in provisioning requirements.
PROFITABILITY AFFECTED
As a consequence, banks’ profitability was adversely impacted and risk aversion set in. Only private sector banks (PVBs) were able to manage positive credit growth during the year.
SCBs’ total income increased marginally, mainly driven by non-interest income. Interest income growth was restrained by subdued credit growth and an increase in NPAs.
On the expenditure side, the interest expended also experienced negligible growth due to the surge in low cost funding from CASA deposits on account of demonetisation and the slower pace of transmission of policy rate cuts to lending rates vis-a-vis deposit rates.
The lower increase in net interest income vis-à-vis a year ago resulted in a marginal decline in banks’ net interest margin (NIM), although with the introduction of the Marginal Cost of Funds-based Lending Rate (MCLR) since April 2016, banks appear to have tweaked their spreads over the MCLR in order to maintain their NIM.
The sharp increase in net profits needs to be viewed in the context of a low base in 2015-16 when they had declined precipitously owing to sizeable provisioning requirement. Bank group-wise, PSBs continued to record net losses during 2016-17, although they moderated in relation to a year ago.
The State Bank group incurred losses in contrast to net profits a year ago, whereas nationalised banks reduced their losses year-on-year. PVBs posted a muted increase in profits, resulting in a decline in return on assets.