BLOG: Budget must have meaty allocation for loss-hit PSU banks

TT Ram MohanIndia's public sector bank stocks have crashed following higher provisioning or expected higher provisioning at many banks. The higher provisioning follows directives from the RBI that banks fully recognise NPAs and provide for these.It is natural for bank shares to drop in value as a result. There could be overshooting here, which again is natural in such situations. But a crash in stock values doesn't signify a crash in banks themselves. As the RBI governor has indicated, a few PSBs may end up with negative net worth but the rest will not. Many PSBs could still be meeting regulatory capital requirements.However, all banks will have seen erosion in equity. This will undermine their ability to lend and grow. So, having got banks to provide fully for NPAs, it is incumbent on banks to provide enough capital. The RBI governor and the finance minister have indicated that banks will receive enough capital support. But this needs to be backed by solid allocations in the forthcoming budget. We cannot have banks providing for losses and suffering erosion in net worth without their capital position being fortified. The RBI must place in the public domain information about the capital adequacy position at various PSBs after capital infusion is announced or has taken place. This will serve to dispel apprehensions and should result in stock values bouncing back.The interesting thing is that the panic is confined largely to the financial markets. Ordinary depositors don't seem worried and there's no sign of a run on banks anywhere. This is because depositors know that the government stands behind PSBs. That is one reason why public ownership in banking is good. In times of distress, we not have depositor panic. Had we had any in the present situation, even the better placed banks would have tipped into bankruptcy.Incidentally, Indian banks are not the only one facing a rout in the stock markets. Worldwide, bank stocks have plunged, as this story in FT makes clear. At banks such as Deutsche Bank and JP Morgan, attempts have been made to shore up market confidence through purchases (of bonds by Deutsche Bank and of shares by JP Morgan's CEO Jamie Dimon). Nor are Indian banks alone in trading below book value. This is true of a large number of US and European banks today. In a way, bank shares in India reflect the delayed impact on India (and other emerging markets) of the financial crisis.To expect Indian banks to escape unscathed following this impact is more than a trifle unrealistic. By the same token, talk of mismanagement and bad governance at these banks are hugely overblown. There have been mistakes in lending. However, by and large, PSB stocks' fall reflects their broad exposure to crucial sectors of the Indian economy. If the economy and these sectors suffer, so will bank stocks. Period.(The writer is Professor, Finance and Accounting Area, Indian Institute of Management Ahmedabad and blogs at http://ttrammohan.blogspot.in)