Daily Editorial Update – A robust and resilient banking sector critical to ensuring strong economic growth
Hello and welcome to exampundit. Here is today’s editorial update from the very best Economic Times. The title of today’s article is A robust and resilient banking sector critical to ensuring strong economic growth and penned by YES Bank CEO.
Today’s Topic: A robust and resilient banking sector critical to ensuring strong economic growth
The banking sector is the bulwark of the economy. It plays a crucial role in the latter’s overall growth and development. So, a robust and resilient banking sector becomes critical to ensuring continued growth, as well as to avoiding the cascading impact on the economy due to protracted stress in this sector.
According to the Centre for Monitoring Indian Economy (CMIE), as of December 2016, around 65% of the overall outstanding credit has been extended by public sector banks (PSBs), while private sector banks account for another 26%. A CARE Ratings study pegs the total non-performing assets (NPAs) in December 2016 of banks at Rs 6,97,409 crore, of which Rs 6,14,872 crore is attributed to PSBs.
So, it is imperative that PSBs are financially strong enough. While GoI has taken several steps for resolving NPAs, there is a pressing need to strengthen the guidelines through specific measures.
* PSBs need about Rs 1,80,000 crore of equity capital by 2019 to meet various regulatory requirements under Basel 3 norms. Akin to a sovereign wealth fund, a bank investment company can be set up as a core investment holding company, under the purview of the finance ministry, to hold equity shares in PSBs, which can be permitted to raise resources from the capital markets for future capitalisation.
* A target is needed to reduce GoI’s shareholding in PSBs to 26%, even as it continues to remain the main promoter. At the same time, it is critical to overcome the current low valuation PSBs are faced with, to help in a successful and attractively priced capital raising.
To this effect, RBI should introduce a remunerated and non-collateralised standing deposit facility to cover cash reserve ratio (CRR) balances, and also to absorb excess liquidity. More overseas branches can be allowed with tight lending norms to raise more low-cost long-term funds before global interest rates move up.
The Priority Sector Lending (PSL) requirements can be reduced from the current 40% to 25%. Further, PSL bonds, similar to the recently introduced infra or affordable housing bonds, can be expanded to generate lowercost long-term funds for the banks.
Tip: Time to Sell
Many leading PSBs have, in the past, invested in prime real estate, and made financial investments in rating agencies, exchanges and allied businesses such as home finance and insurance. PSBs could utilise the current uptick in the capital markets to monetise these holdings and raise incremental capital.
* To provide impetus to the resolution of existing substandard assets, a Strategic Asset Resolution Committee should be formed. This should thoroughly review the top 50-100 NPAs across the banking system and monitor the progress of stressed asset resolution on a monthly basis.
Under this committee, several subcommittees pertaining to specific stressed sectors (iron and steel, power, roads and highways, textiles) can be constituted under the active guidance and investment of the respective ministries. These subcommittees can play an instrumental role in expediting the asset resolution by leveraging their sector expertise and drawing upon the support and inputs from the respective ministries.
They should evaluate the resolution process at the sectoral level, with escalations to the parent committee to seek support or interventions, as and when needed. This direct oversight of the respective ministries would go a long way in facilitating an expedited resolution of the large stressed assets.
* The regulatory forbearance, with respect to provisioning moratorium for strategic debt restructuring, can also be extended over the bankruptcy resolution period, till a decision on the way forward by lenders is taken.
* To help streamline the multiple approvals required for effecting change in management under strategic debt restructuring, a single-window clearance should be put in place to avoid long delays for takeovers by new promoters.
While the aforementioned can expedite the resolution of existing NPAs in the banking system, it is equally important to ensure revitalisation and value preservation in assets with incipient stress. Incentivising last-mile working capital or priority financing can be a potent tool. This will require are view of existing policy guidelines.
Specific guidelines need to be framed to allow priority of claims on assets and cash flows of the borrower for the incremental priority debt provided over the claims of existing debt. The additional funding extended outside the restructuring mechanism should be classified as priority debt.
This implies that the additional funds provided to an NPA should be allowed to be classified as ‘standard’ for a specified period, even if funding is provided outside the restructuring package, along with allowing income recognition on an accrual basis for the specified period. This will incentivise banks to extend additional financing to support substandard assets, in case there is viability and economic value preservation in the undergoing project.
The threshold for obtaining consensus on a priority debt should also be relaxed. It could be around 60% of lenders by value, as opposed to the 75% by value required currently, which is difficult to meet and leads to significant delays.
With the economic cycle now on an upward trajectory, the banking sector’s role becomes crucial to provide the necessary capital. Its robustness, thus, assumes even more importance.