For many Indian banks, keeping asset quality impeccable at any cost is the Holy Grail to satisfying investors and pushing up their valuations. From now on, they will find it difficult. India’s banking regulator seems to have cracked the Da Vinci code of lending in the world’s fastest growing major economy.
All the 10 small finance banks that have got the in-principle licence from the Reserve Bank of India (RBI) are now armed with the regulator’s final nod; eight of them are up and running. How have they been doing? Two in the lot—Equitas Small Finance Bank Ltd and Ujjivan Small Finance Bank Ltd—are part of listed entities; their financials are in the public domain. I caught up with R.
Former Reserve Bank of India (RBI) deputy governor Subir Gokarn once said banks’ NPAs (non-performing assets) are like cancer; if not treated at an early stage, the patient will die. Viral Acharya, RBI’s current deputy governor in charge of monetary policy, has used another simile to illustrate the same point—a bank not keeping adequate capital to absorb losses arising out of bad loans is like allowing a person who has slipped off the terrace of a skyscraper to fall and die. The latest move of empowering RBI to directly intervene in the resolution process is expected to speed up the exercise, but some of the banks will “slip off the terrace of a skyscraper and die” unless the government keeps the parachute ready in the form of fresh capital infusion.
Over the next fortnight, many state-owned banks, led by the nation’s largest lender State Bank of India, are expected to aggressively push for deep restructuring of some of the large bad assets such as Essar Steel Ltd (Rs45,000 crore) and Bhushan Steel Ltd (Rs47,000 crore), among others. These will be taken up at the executive committee meetings of individual banks and also the forum of lenders. On the table are plans for extension of the tenure of repayment of loans, reduction in interest rates, pledge of shares as well as personal guarantees by the promoters of distressed companies and conversion of unsustainable debt into preference shares/low coupon debentures, and other covenants.
Talks on consolidation in Indian banking have been going on for almost two decades. A seminal report on banking reforms, authored by a panel headed by former Reserve Bank of India (RBI) governor M. Narasimham in 1998, recommended merger of banks to make them strong.