BL Research Bureau

The Reserve Bank of India (RBI), in its Monetary Policy last week, tweaked norms for risk-weights on bank loans to NBFCs in a bid to free up capital for lending. But many public sector banks (PSBs) may well choose to shore up their capital ratios rather than grow their loan books.


In the past one-and-a-half years, PSBs have done just that — consolidate their loan books and reduce their exposure to risky assets. Despite the Centre’s massive capital infusion of ₹88,000 crore into PSBs in FY18, these banks have since either shrunk their loan books or grown them only modestly.

Importantly, they have reduced their risk-weighted assets (RWAs) by a faster pace (than decline in loans), implying they have been moving to safer and less risky loans assets.

Between the September 2017 (before the mega bank recap) and December 2018 quarters, the RWAs for most PSBs fell 15-20 per cent.

In the nine months ended December 2018 alone, RWAs fell 6-13 per cent for many PSBs. The RBI’s February 2018 circular on stressed assets had led to a steep rise in bad loans provisioning in the March 2018 quarter, eating into banks’ capital. Paring exposure to risky assets has eased up their capital.

The RBI placing restrictions on credit to unrated borrowers, or on expansion of high RWAs for banks under prompt corrective action (PCA), has also led to a fall in RWAs.

But non-PCA banks, such as Bank of Baroda and Punjab National Bank, have also reduced their exposure to risky assets since September 2017. For SBI, (as a group) too, RWAs moderated between March and September 2018.

Borrower profile

RBI regulations require that the amount of capital a bank holds is pegged to the profile of its borrowers; riskier the borrowers, higher the capital needed.

The central bank assigns different ‘risk weights’ to different types of loans based on the possible defaults for each category. Loans to the Central government have a 0 per cent risk weight while those to commercial real estate have a 100 per cent weight. Capital ratios are determined with RWA as denominator and hence a decrease in RWAs eases up capital.

Numbers reveal that between the September 2017 and March 2018 quarters, the tier I capital ratio for weaker PSBs (placed under PCA) fell notably despite the massive capital infusion by the Centre and reduction in the banks’ RWAs. Banks such as IOB, Corporation Bank, Allahabad Bank, PNB and Andhra Bank were just about meeting their tier 1 capital ratio requirement of 7 per cent as of March 2018.

The RBI’s February 2018 circular — that did away with all old restructuring schemes — forced the banks to accelerate the NPA recognition exercise. This led to around ₹1.2-lakh crore of NPAs being added to the system and PSBs together reporting an eye-watering loss of ₹62,000 crore in the March 2018 quarter alone.

Further shrinking

In a bid to ease up pressure on capital, PSBs continued to shrink their RWAs in the nine months up to December 2018, and their RWAs fell 6-13 per cent.

This, along with the Centre’s capital infusion and moderation in bad loan accretion, has helped improve the tier I capital ratio for some banks. Even so, some, such as UCO Bank and IOB, are just about meeting the requirement.