2019 may finally put an end to India's banking woes

After many false hopes over the past few years, there appears to be a new dawn for the banking industry in the year 2019. The pitch is somewhat ready for a long innings, although there could be occasional bouncers either from the government in an election year to win votes, or a financial calamity from shores far away.First, both the regulatory moves and the realisation among banks that prudence pays would ensure that excesses in the Indian financial world is limited. Second, the resolution of corporate stressed assets might accelerate following the efforts to declog the system. Third, the signs of slowing down of bad loans formation would become prominent. Even the Reserve Bank of India in its latest Financial Stability Report acknowledged that gross bad loans would slide in fiscal 2019, the first since 2015.What would be the icing on the cake, if at all it does, is the success of the three-way merger of Bank of Baroda, Vijaya Bank and Dena Bank.Mergers in India are essentially a bail-out exercise. But unlike in the past, where failed private banks were merged with public banks to save depositors, the merger between these three, albeit forced, is consolidation of banks under the same promoter to achieve economies of scale and to eliminate duplication. The success of this exercise would pave the way for the new government to push more bank mergers. 67342887 “As we enter 2019, NPA formation has slowed significantly across the sector and recoveries from recent NPAs are streaming in. That should mark 2019 as a bounce-back year,” said Jairam Sridharan, chief financial officer at Axis Bank.Industry’s bad loans were at over 10% of total as on March 2018, up from less than 4% in March 2014, data from the RBI showed. It rose from around 7% in fiscal 2016. In the period up to September, it was at 10.8%.Banks in India have not experienced a worse year in the past two decades than what it had encountered in the year that had just passed by. The sector as a whole has seen losses for the first time since 1993-94, thanks to the huge overhang of stress especially for the stateowned lenders which cumulatively control two-thirds of Indian banking.The public sector bank group made Rs 85,400-crore losses in 2017-18, while private banks continued to be profitable. Six of 21 public sector banks have seen the severest stress with one-fifth of their loan portfolio turning bad. Twelve of them made losses in the third quarter — it is an improvement from 19 in the March quarter. The successive quarterly losses weakened their capital and pulled down capacity to lend. Public sector banks lost market share rapidly as the space vacated by them was grabbed by non-bank lenders in 2017-18, but some rebalancing was evident during the third quarter of the current fiscal following the liquidity crisis for NBFCs. “2018 was not a significantly different year than last few years in terms of financial numbers, but it probably has set base for stronger banking system as we move forward,” said Prakash Agrawal, head-financial institutions at India Ratings. “Incremental delinquencies, at least from corporates, are likely to be lower. Also banks generally have stepped up their provision in 2018, which strengthens the balance sheet. The decline in yield would result in banks reporting strong treasury profits at the year-end. So in this sense, we might start seeing better numbers from 2019,” he said.Some of these banks may not be in perfect shape, but they have solid depositors base and geographical reach to their advantage, although technology is breaking such barriers. Four of 12 banks under Prompt Corrective Action are likely to come out of the regulatory sanction soon aided by loan recoveries and government’s largesse in throwing taxpayer money into them.INSOLVENCY RESOLUTIONBilled as the panacea for Indian banking, the Insolvency and Bankruptcy Code (IBC) failed to live up to expectations. The resolution process remained slow with 50% of the cases admitted in the National Company Law Tribunal exceeding the 180-day deadline, while 30% of cases crossed even the 270-day deadline — the maximum allowed for resolution under law. Merely 4 out of the initial 12 biggest defaulters from the RBI list were resolved, while cases involving over Rs 1 lakh crore are yet to see the light of the day.“We would believe that actual benefits of IBC would reflect in the years ahead and would have dual benefit of lower delinquency and better recovery,” Agrawal of India Ratings said. 67342888 IT’S STILL A WORK IN PROGRESS“The future of credit repayment culture will hinge on better resolution,” RBI said in its banking progress report. “Minimising the time taken to resolve cases and the development of a conducive environment that discourages unnecessary delays assume importance,” it said.RBI’s proposed public credit registry for aggregating information about borrowers from multiple agencies at one place is expected to repeat the performance in retail loans that brought down delinquencies substantially.“2019 will be a turning point because we expect most issues to be sorted out giving banks more space for operations. We can expect only positive changes from hereon, which, however, will be gradual in nature,” said, Madan Sabnavis, chief economist at Care Ratings.REGULATORY OVERSIGHTWhile financial metrics may have been bad last year, the RBI has put the fear of god in corporate borrowers with its February 12 circular that says missing payments by a day would lead to be classified as a default as is the case with bond markets.“2018 turned out to be a year of historic significance for the Indian banking sector. The February 12 circular of RBI on how to deal with stressed assets started the year with a firm regulatory hand,” said Axis’s Sridharan. 67342895 Even as the industry, especially private sector lenders have welcomed the move, some companies have challenged the rule in the Supreme Court.“The enhanced regulatory oversight would help the system by elimination of excesses, create a cleaner framework for asset quality recognition, substantially improve corporate governance standards and inculcate financial discipline in borrowers,” said Karthik Srinivasan, Icra’s group head for financial sector ratings.Concerns over asset quality have eased and banks with higher provisions would show stronger balance sheet. Now, how quick they can take the growth path will hinge on their ability to raise capital.The government injected Rs 123,100 crore in the past three years, but more than 70% of that was absorbed into losses. RBI suggests the recapitalisation amount must be large enough relative to the total capital base to make a perceptible impact on credit growth. The government raised its infusion plan for 2018-19 to Rs 106,000 crore from Rs 65,000 crore but this may still fall short.“Notwithstanding the cleaning of balance sheets for banks across ownership, the struggle for public sector bank would continue as they will feel the pinch owing to absence of capital as per requirement,” said Kuntal Sur, financial services partner at PwC.While the capital scarcity and bad loans would not go away anytime soon, at least the WhatsApp jokes that go around bank chairmen saying ‘worst is over’ for nearly five years, may come to an end.

from Economic Times http://bit.ly/2ApKuX4