Countdown for the union budget 2023 has begun. Finance Minister Nirmala Sitharaman will present the budget on February 1. The fate of wish lists and expectations conveyed by various stakeholders to the government during framing of the budget will be worth watching.
However, it would be interesting how the budget will deal with the banking sector. If pre-budget reports are to be believed, the government won’t be keeping a provision in the budget to infuse capital in the banks (public sector banks).
Reports appearing in a section of media a few days back quoting sources stated that the government is unlikely to announce capital infusion for public sector banks (PSBs) in the upcoming Budget as their financial health has improved significantly and they are on track to earn a combined profit of Rs 1 lakh crore.
One of the major problems with the Indian banking industry has been the huge loads of bad loans as huge corporate loans slipped into NPA (non-performing basket) basket.
These bad loans put major players in the banking industry on the brink of collapse.
However, over the years continuous engagement of banks to resolve the bad loan issue helped not to allow the situation to go out of hand.
During its war on bad loans, the banking industry witnessed mergers and bailouts as key policy tools at the hands of the government to clean up the burgeoning bad loans. Meanwhile, the government’s efforts to reduce bad loans through 4Rs strategy of Recognition, Resolution, Recapitalisation and Reforms are yielding results. According to the report, 12 PSBs reported a 50 per cent jump in combined net profit at Rs 25,685 crore in the September quarter.
Recapitalizaton of the banks has remained a priority with the government. If we look at the past five years, we find that from 2016-17 to 2020-21, the government infused Rs 3,10,997 crore to recapitalise banks. Out of this, Rs 34,997 crore were sourced through budgetary allocation and Rs 2,76,000 crore through issuance of recapitalisation bonds to these banks.
Lastly, the government had earmarked Rs 20,000 crore for recapitalisation of PSBs through supplementary demands for grants in 2021-22.
Even as the government had indicated to go for another round of capital infusion in the PSBs to keep the banks afloat, the better financial results of the banking sector has given a comfort to the government. As disclosed by the sources, the government won’t be making any capital infusion in the banks and there would be no announcement in this regard in the budget 2023.
The performance of banks has improved. Their asset quality has shown significant improvement in the first half ending September 30, 2022 period for FY23. As per RBI’s data, scheduled commercial banks’ gross non-performing assets (GNPA) has dropped to a seven-year low, while net NPA has contracted to a decade low. Also, banks asset quality for the industrial sector improved, while there has been a massive decline in large borrowers’ shares by end of September 2022.
The gross NPA continued to decline and stood at a seven-year low of 5% in September 2022. Meanwhile, the net NPA stood at a ten-year low of 1.3% under which private bankers’ net NPA was below 1%.
In its financial stability report for December 2022, the apex bank has said, buoyant demand for bank credit and early signs of a revival in the investment cycle are benefiting from improved asset quality, return to profitability, and strong capital and liquidity buffers of scheduled commercial banks (SCBs).
However, in the backdrop of the improved performance, can we say the worst is over for the banking sector? The kind of economic scenario around us suggests not to be complacent about the improved figures as the consistency in the improvement bears some question marks. A single quarter can wreak havoc with the figures.
Actually, the emerging scenario in the banking sector demands consolidation to remain afloat with profitability.
Consolidation of banks is seriously emerging as an appropriate means to pull the banking industry back on the track. Some time back, researchers at the Reserve Bank of India (RBI) published a paper wherein they advocated that ‘more consolidation in India’s struggling banking sector will help lenders lower costs and efficiently scale their operations.’ The researchers have suggested that further avenues of consolidation in the banking sphere may be explored.
Burden of non performing assets is going to remain a challenging issue in coming times, despite the fact that the gross NPA stood at a seven-year low of 5% and net NPA at a ten-year low of 1.3% in September 2022.
So, it is consolidation through mergers and bailouts which is going to hold ground in future to see the banks burdened with bad loans remaining afloat in business. It’s worth mentioning that the termite in bad loans is driving up the cost of capital and it would make sense for the government, which is owner of the state-run banks, to opt for mergers.
Even as the government along with the RBI as regulator is engaged to pull the banking industry out of the bad loan mess, there are certain areas where banks can be granted relief. For example, corporate social responsibility (CSR) spend by companies, including banks, is mandated through the statutory route of Companies Act 2013. The Act envisages companies with at least Rs 5 crore net profit, or Rs 1,000 crore turnover or Rs 500 crore net worth to necessarily spend 2 percent of their average annual net profit (profit before tax) on CSR activities in each financial year. The implementation of the Act started in the financial year 2014-15.
Giving a new facelift to the concept of CSR in the country through a statutory route is something which suits our societies. Making the companies accountable on this front as far as their spend in social uplift beyond their core business activities is concerned is also a step in the right direction.
But putting this uniform CSR blanket on a wide range of companies in varied sectors of the economy needs a relook. What I mean to say is that the mandatory part of the CSR rules should have been introduced with some flexibility in case of banks.
Overall health parameters of the sector where companies fall under the ambit of CSR rules makes sense to be considered before making it mandatory for implementation.
As far as the banking sector is concerned, mandating CSR spend needs reconsideration. The industry has been reeling under tremendous pressure for the past few years. The most visible turmoil is in bad loans. Demonetization also played havoc with the industry. It not only subjected the human resources of the bank to innumerable hardships, but banks were forced to bear huge expenses to get the process of demonetization concluded.
Since the country is considered a bank-led economy and the economy is not doing well, it makes sense to leave the banks out of the ambit of CSR rules. Notably, a few years back, the finance ministry had written to the corporate affairs ministry, asking the latter to exempt banks from the corporate-social responsibility (CSR) spending mandated by the Companies Act.
Meanwhile, what is in store for the banking sector in the budget 2023 would be an interesting thing to watch when the Finance Minister Nirmala Sitharaman will present the budget on February 1.
(The views are of the author & not the institution he works for)
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The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.