Public sector banks are cut out for major tasks of growth and profitability despite weak demand and slowing economy even as they grapple with bad loan resolutions and the consolidation process, feel bankers.
The banking sector, with financial assets worth Rs 77.70 lakh crore, is capital-starved and going through its most uncertain phase.
Bankers say this is a transformation phase where consolidation and recovery of non-performing assets (NPA) worth Rs 8.5 lakh crore will have to go hand-in-hand.
A south-based, mid-sized public sector bank’s chief executive officer told Moneycontrol, “The sector is witnessing a change and the government will definitely aim to decide on merging at least one or two banks this fiscal. Though there is no timeline, we have already put out an expression of interest to the government. Banks will have to work on pumping up adequate capital, improve quality of assets and ensure there is sufficient provision towards the bad loans. ”
Another bank official said, "We are working on the resolution of NPAs. Credit growth is picking up in the retail segment but corporate loans are still weak. We are looking at selling non-core assets as well."
The Reserve Bank of India (RBI) has also initiated prompt corrective action (PCA) on about six stressed public sector banks -- Dena Bank, Central Bank of India, IDBI Bank, Indian Overseas Bank, Bank of Maharashtra and UCO Bank -- based on their performance relating to capital and bad loan position.
Banks are also trying to get more experts to tackle the newer areas relating to risk management, technology, improving skills and getting more business in a weak economy.
A senior public sector executive director informed he is constrained on time as he has been running around to talk to his clients, attend his increasing number of internal meetings for decision on NPAs, capital raising plans and business growth.
After the merger of country’s largest lender State Bank of India (SBI)’s five associates and Bharatiya Mahila Bank with itself this year, though the SBI was catapulted into one of the top 50 banks in the world, its NPA pain only worsened.
Following the merger, its gross NPAs have jumped from Rs 1.08 lakh crore to Rs 1.79 lakh crore. In percentage terms, it rose from 7.23 percent of its advances to 9.04 percent. While its own net profit was Rs 2,815 crore in the March quarter, the merged entity reported a loss of Rs 3,300 crore.
Apart from these concerns for banks weaker than SBI, bankers say that at this stage with weak credit demand and loan growth ranging around 5-6 percent, mergers should not prove to be more damaging.
Usha Ananthasubramanian, MD and CEO of Allahabad Bank, in a speech at National Institute of Bank Management (NIBM) on ‘Regulatory technological and human resource challenges for enhancing effectiveness of Indian banks’, said the Indian banking sector is at a critical juncture in its evolution and it is now clear that the slump in credit growth and increase in stressed assets has affected the profitability of all banks, and threatens the very survival of some of them, reports said.
“Shifts in consumer preferences, combined with changes in technology and regulations, have created a perfect storm,” she said.
As per Fitch Ratings' latest estimates, banks need USD 65 billion (about over Rs 4 lakh crore) capital by FY19.
Ananthasubramanian pointed out that operational risks the banking sector faces due to changing customer expectations and technology could cause massive alterations in banking and give it an entirely different profile. Technology has not only been changing customer behaviour, but will also enable new risk-management techniques, often coupled with advanced analytics, she said. Specialised banking has also thrown up a different type of competition. Advanced technology, sleek workforce and hassle-free, last-mile delivery are their positives vis-a-vis legacy banks, she said.
On the human resource challenges, Ananthasubramanian added the middle-management ranks of banks are being thinned by retirements, which has not been offset with adequate fresh recruitment. Banks need experts in specific areas like project evaluation, treasury, HR and risk management, she added.
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