2018: the year of bank resolution and recovery?


Globally, bankers are expected to do three things: collect deposits, give loans and invest in government bonds and other financial instruments. In India, they end up doing a few other things as well, including cleaning up the neighbourhood where their branches are located with a broom as part the government’s Clean India Mission to promote sanitation. Ironically, the balance sheets of many banks in India at the moment are in dire need of a clean-up.

In 2015, the Indian banking community took a break from other activities to open bank accounts under a financial inclusion drive by the government aimed at ensuring access to basic banking services for every household.

Banks have opened 307.6 million accounts since the drive was launched in August 2014. Government-owned banks’ contribution to this is more than 90%. At this point, the beneficiaries are keeping Rs71,232.93 crore in these accounts.

The next year tells a different story. As 2016 neared the end, bankers were busy counting notes, literally.

Over 50 days in November and December, Rs15.4 trillion worth of Rs1,000 and Rs500 banknotes—some 86.9% of the value of the total notes in circulation—were withdrawn after a historic address to the nation by Prime Minister Narendra Modi.

One of the many objectives of this black swan event was to attack the hoarders of black money, or unaccounted-for, untaxed wealth.

It was the responsibility of the bankers to check the colour of money at the more than 116,000 bank branches and stack new currency notes in 208,000 automated teller machines (ATMs) across the country.

Last year, bankers spent their time and energy in taking loan defaulters to the bankruptcy court. Weighed down by Rs10 trillion of stressed assets, they have been chasing rogue borrowers; but in 2017, it became a mission, pushed by a very aggressive banking regulator. Armed with an ordinance that empowered it to order banks to chase loan defaulters, the Reserve Bank of India (RBI) in June identified 12 loan accounts, with 25% share of gross bad loans in the system for launch of immediate bankruptcy proceedings.

At that time, the Indian central bank said lenders should finalize a resolution plan within six months for their top 500 stressed accounts; if they failed to find a resolution through other means, they should move the court for bankruptcy.

Fast losing out patience, in August, RBI followed it up with another list of 28 large stressed accounts and asked the banks to either resolve them or launch insolvency proceedings by December. Banks have a collective exposure of Rs1.4 trillion to these 28 accounts.

What will be the dominant banking trend in 2018?

One thing for sure, along with fighting pitched battles with the loan defaulters, bankers will start giving loans anew in 2018. Over the past three years, credit growth has been poor. A weak investment climate was responsible for this.

Over-extended Indian corporations have had neither the capability nor the inclination to lift bank credit and set up new projects. This is expected to change in 2018. Better cash flows, higher capacity utilization and a pick-up in some high-frequency indicators are encouraging analysts to anticipate an upturn in private capital expenditure, if not across sectors, at least in some select pockets.

While companies were not forthcoming in lifting bank credit, bankers, too, were not willing to lend for fear of piling up more bad assets.

Banks do not earn any interest on their bad loans; on top of that, they need to provide for or set aside money for such loans. This hits their profitability. Hefty provisions have also pushed many banks into losses and eroded their capital. This is why they have been diffident in giving loans.

The government has addressed this by announcing a Rs2.11 trillion recapitalization of India’s state-owned banks. While a debate is under way on whether this money will be enough to meet the capital needs of public sector banks (keeping in mind the requirements under Basel III norms, which will be in place in 2019) and how much of this infusion is growth capital, one thing is certain: there will be strings attached to disbursement of this money. RBI and the finance ministry have been jointly working on this.

Recapitalization is not something new for India’s state-owned banks. Historically, the finance ministry, representing the government, the majority owner of this group of banks, decides on which bank gets how much capital.

It has been a sort of a democratic exercise where banks get funds according to their size and not their efficiency and prospects. For the first time, they would need to earn the money. There will be definite preconditions and only when they accept those conditions will the banks get a lifeline in the shape of a capital top-up.

In other words, bank recapitalization and banking reforms will go hand in hand. It may be too early to expect dramatic mergers and consolidation among public sector banks, but we will definitely see some banks aggressively selling non-core assets and shrinking their balance sheets.

Finally, if the early indications are anything to go by, 2018 could be the first year of bad loan resolution.

When a series of restructuring exercises, packaged by the banking regulator, failed, RBI inspectors took upon themselves the job of identifying bad loans and forcing banks to recognize them as such. Until 2017, the focus was on recognition. Bad-loan resolution and recovery will be the themes in 2018.

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