Indian Economy: The Scenario Looks Bleak: Fitch Group 

During FY14-FY19, the government and Life Insurance Corporation (LIC) together infused INR 5.9 trillion in PSBs. However, from the value creation objective, the scenario looks bleak. The current market value of government stake including LIC of INR 4.4 trillion as on 29 July 2019 is significantly lower than the capital infused.

'Time to revaluate the objectives of select public sector banks and their role in the Indian economy'

By Onkareshwar Pandey

New Delhi, August 8, 2019: While the government has infused huge capital in PSBs, the same has largely been used to mitigate losses and has failed to contribute meaningfully to credit growth.

During FY14-FY19, the government and Life Insurance Corporation (LIC) together infused INR 5.9 trillion in PSBs. However, from the value creation objective, the scenario looks bleak. The current market value of government stake including LIC of INR 4.4 trillion as on 29 July 2019 (about INR 2.2 trillion at FYE14) is significantly lower than the capital infused.

Only four banks (Indian Bank, State Bank of India, Bank of Baroda and Canara Bank reported current value of investment higher than the investment amount. It excludes market capitalisation of Dena Bank & Vijaya Bank, as both banks are merged with BoB, on 1 April 2019.

India Ratings and Research (Fitch Group) opines that it is time to revaluate the objectives of select public sector banks (PSBs) and their role in the Indian economy.

The sharp deterioration in asset quality in the last few years led to accelerated provisions among all PSBs. This caused banks to suffer massive losses, which in turn led to failure in meeting objectives of the Indradhanush Scheme such as recapitalising banks based on their performance and their ability to support credit expansion.

In reality, the capital infused was largely consumed to tide over losses resulting from provisions required for non-performing assets.

Over the years, the market share of PSBs in incremental credit generation shifted to other market participants including private banks, foreign banks, non-bank financial companies, housing finance companies, and mutual funds.

The market share of PSBs fell to 46.5% in FY19 from 60.9% in FY14. More importantly, in terms of incremental credit, the share of PSBs has been 26.2% over FY14-FY19.

The objective of nationalisation of banks included financial inclusion as the primary objective, along with increasing availability of credit to priority sectors such as agriculture and small and medium enterprises (SMEs).

Due to stress of bad corporate loans in the system, the incremental credit to agricultural and SMEs segment by PSBs has been only 1.3x-1.5x of incremental credit to agricultural and SME segment by top 6 private banks (by the size of its assets).

Anecdotal evidence suggests PSB’s share in funding direct small ticket lending to agri and other priority sectors still remains high.

Recapitalisation is a prompt response to infuse funds in cash-strapped public sector banks. The capital infusion by the government in PSBs may ensure banks’ solvency but may not necessarily ensure stability and growth in the absence of non-financial and structural reforms.

Without structural reforms in place, the government will have to continue to inject capital into banks in times of stress, which will strain its own finances and hinder efforts for fiscal consolidation.

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