2021: The year of capital challenge

Mumbai: When Covid-19 triggered a payment lockdown, it did not discriminate among banks. Both the Bank Nifty and private banks index almost halved, and the state-run banks’ index fell more – 56%.As the year draws to a close, investor discrimination is palpable. The Bank Nifty and the private banks indices have almost erased all their losses, but the Nifty PSU Bank Index is still down 30%.PSU banks have become the poor cousins of Indian banking, and the belief only strengthened this year. For years, they did not get capital from the markets and the taxpayer had to stump up more than Rs 3 lakh crore in recent years.With the government’s hands tied due to a collapse in revenues and increased spending to fight the Covid-19 fallout, banks were forced to test the waters on private capital. The result is a wake-up call.Yet again, state-owned institutions had to bail out the share sale of Punjab National Bank and IDBI Bank while Canara Bank scraped through. This is at a time when private banks have raised more than Rs. 54,000 crores in capital and public share sales are flying off the shelves, with benchmark indices at record highs.One need not look far as to why investors are shunning state-run banks.Return on equity at private banks was 3.3% last fiscal when state-run banks lost 4.16%, RBI data showed. State run banks have reported losses for five straight years into March 2020.Furthermore, investors are wary of the value of assets in state-run banks’ books and their ability to navigate the digital era where they are still directed by bureaucracy on how to manage the show. Investors seeking to profit are averse to businesses controlled by bureaucracy and the political class.``A few major private banks have taken a lead in raising capital but smaller lenders, especially the ones with already weak balance sheets, are conspicuous by their absence, partly reflecting uncertainty as to whether or not they will be able to raise resources in prevailing market conditions,’’ says the RBI’s latest Report on Trend and Progress of Banking in India.While the bad loans pile-up after the moratorium ended may be far less than what was feared in March, it would still leave a big hole in the books of banks as many businesses struggle to reinvent themselves to new reality.Gross bad loans of the banking system is forecast to rise to 10.6 percent from 7.9 percent and net bad loans can climb to 3.2 percent from 2.2 percent in September, says ICRA, a rating company.In 2020, PSBs with nearly 60 percent share of assets had capital of Rs. 6.99 lakh crores while private banks with assets of around 30 percent had capital of Rs. 6.54 lakh crores, reflecting the advantage the likes of HDFC Bank, or Kotak Mahindra have when the economy revives.PSU banks, a vital component of the Indian economy, would be entering the new year a lot weaker than they were before – both in terms of capital and bad loans. They can’t play their role without sufficient capital.State-run banks could be under more strain as they face the call option on about Rs. 23,300 crores of AT 1 bonds. ICRA estimates that these banks need to raise at least Rs. 43,000 crores just to be compliant and more if they have to lead credit growth.Both the regulator and the government’s Niti Aayog appear to realise that it’s impossible for the state to keep providing the oxygen to banks. The capital challenge for them in 2021 could be decisive in keeping them relevant and vibrant or let them face the fate of many other state-owned businesses.

from Economic Times https://ift.tt/3hDLbAM