The blow-up of the United Bank of India could not have come up at a more inopportune time for Reserve Bank of India Governor Raghuram Rajan, on a mission to cleanse the system, and the next government, probably headed by the Bharatiya Janata Party if one were to go by opinion polls. As the Bimal Jalan committee works on setting stiff conditions for potential private sector bank licences, what flies in the face of the regulator is the drain of resources because of mismanagement and corruption in public sector banks.
The next government, before fuelling economic growth, has to bail out the banking system. And there is a scary parallel for the principal opposition party to ponder over if it comes to power — It may well be de javu for the party. At the start of its last stint in power, bad loans were as high as 9 per cent of total loans; it is more than that now. Three state run lenders — Indian Bank, UCO Bank and, yes, United Bank of India — were in trouble in 1998.
Now almost all the 26 are , the difference is in the magnitude. As then, there is demand for capital now. It was Basel II then; it is Basel III now. As political parties joust in the run up to the 2014 national polls, the biggest challenge anew government faces is potential internal crisis in the form of India's state-run banks. A time bomb may well be ticking. Bad loans as a proportion of total loans is more than 4.2 per cent, and if restructured loans are taken into account, it is more than 10 per cent, which essentially puts all capital at risk.
Stress tests conducted by the regulator, including a contagion effect, show that over 40 per cent of the banking industry's capital would be wiped out if bad loans were to rise 100 per cent, the RBI's Financial Stability Report shows. The economic growth slowdown is blamed for much of the ills of the PSU banks, but that's just part of the story. The bigger problem is mismanagement, corruption, lack of management skills, political interference, and a nimble private sector. "There is a vacuum in the top management," says BA Prabhakar, former chairman and managing director at the state-run Andhra Bank
"The quality of the top management is getting weaker. Frequent change in policies is leading to discontinuity." Other than skills and political interference, capital could also become a key issue. Ratings company Moody's Investor Servic-es reckons the government will have to provide Rs25,000 crore to Rs36,000 crore to meet the core capital needs of banks in FY15. It is not just Moody's, bankers and analysts also feel bad loans have not peaked yet and will rise next fiscal. Nothing illustrates what's gone wrong better than the fact that the bad loan pile-up is concentrated mainly in stateowned banks compared to the cleaner books of some of India's top private banks.
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