With the unprecedented rise in the level of non-performing assets (NPAs) in public sector banks following roll-out of asset quality review by the RBI in September 2015, several strategies were worked out to improve the asset quality. While proposing a massive recapitalisation plan of Rs 2.1 lakh crore for these banks way back in October 2017, the government desired that a reforms agenda be pursued to insist on improvement in performance, setting a certain benchmark.
Accordingly, a new model of reforms agenda — Enhanced Access and Service Excellence (EASE) — was introduced to nurture clean and smart banking. The idea was the outcome of the congregation of top PSU bank honchos, regulators and policymakers in ‘Manthan’, an interactive mind meet held in November 2017. Despite continued asset quality woes, the PSU banks have measured well in the performance metrics built around 140 granular parameters. The first performance report based on EASE metrics reflects the resilience of these banks to continue reforms. The joint presentation of the review report on EASE by the Indian Banks Association (IBA) and Boston Consulting Group (BCG) affirms their improving performance trends.
In fact, the EASE narrative is an extension of the 4R strategy implemented for cleaning up balance sheets of banks initiated during 2015-16. It hinges around: (i) Recognition of stressed assets, (ii) Resolution and recovery of value from bad debts (iii) Recapitalisation to shore up capital base and (iv) Reforms to improve the operational efficiency and quality of customer service to nurture smart banking.
It is an effort not only to clean up accumulated NPAs but more to create a loan repayment ecosystem to prevent pile-up of toxic assets in future. Besides improving asset quality, it has a greater agenda to put PSU banks on a reforms track so that they can continue to play a defining role in the economy.
The banking sector has been amply empowered with the enactment of the Insolvency and Bankruptcy code (IBC)–2016 followed by a couple of amendments to make it work better. Similarly, formation of the Insolvency and Bankruptcy Board of India (IBBI) was intended to regulate operationalisation of IBC. After initial hiccups and demystifying legal tangles, it is now all set to integrate fast with the legal ecosystem to contain bad debts. More important is its ability to influence borrowers to honour debt contract due to the inherent fear of losing ownership of the unit. Eventually, use of IBC will be the last resort as robust repayment culture sets in.
Similarly, the Fugitive Offenders Act and institutionalisation of the National Financial Regulatory Authority will also create a fear psychosis among delinquent borrowers/auditors. The need for using such legislative tools will recede when borrowers are accustomed to self-imposed discipline in creating impeccable credit history that will create a basis for accessing credit in future from formal banking channels. A credible credit history can also lower the cost of borrowings.
Improvement in Asset Quality
The performance reflects that EASE framework has begun to impact the working of PSU banks making them more resilient. Their gross NPAs that had reached 14.6% by March 2018 declined to 13.7% by December 2018. The Standard Restructured Advances (SRAs) prevailing at a high of 7% in March 2015 dropped to just 0.50% by December 2018. The RBI had withdrawn forbearance on SRAs in April 2015. Such truncated SRAs have turned out to be NPAs exacerbating the asset quality mess. The better part of asset quality is the rise in provision coverage ratio (PCR) from 46% in April 2015 to 68.9% by December. Higher PCR empowers PSU banks to manage stressed assets in a better way.
NPA slippage during FY19 also came down from Rs 2.37 lakh crore to Rs 1.79 lakh crore during FY18. Moreover, the stock of pipeline stress under special mention account (SMA) 1 & 2 (loans recording overdue between 31 days to 90 days) in corporate credit declined from Rs 2.25 lakh crore in June 2017 to Rs 1.18 lakh crore by December 2018 reducing the scope of future slippages. Between December 2015 and December 2018, Rs 2.87 lakh crore NPAs were recovered owing to intense follow-up and thrust on debt resolution. Rise in the number of lawsuits and FIRs against willful defaulters had a demonstrative impact on borrowers.
The balance sheets of PSU banks became stronger with increased capital infusion -– from Rs 63,000 crore provided during FY15-17, capital infusion increased to Rs 1,90,958 crore during FY19. This will create space for lending and raise compliance standards. As part of the reforms agenda, the PSU banks should bring about qualitative improvement and introduce smart banking.
Fine-tuning risk management, corporate governance; prudential lending, digital banking, transparency and accountability will be part of smart banking. Collaboration and tie up with NBFCs, fintech companies, peer-to-peer lenders and differentiated banks will be essential to harness the potential for the benefit of PSU banks.
The EASE framework had indeed helped enforce improved performance of PSU banks. But one year is too short a period. Going forward, if the same performance measurement mould of EASE is continued, they should be able to shape well. Moreover, consolidation in the PSU bank space is meant to make them bigger in terms of asset size equipped with better risk appetite. They should work hard to ensure that the merits of EASE are disseminated down to the line management so that every resource at the grassroots works to harness the full potential using the synergy of technology. Data mining, data analytics and market intelligence as part of smart banking should be fully explored. With EASE, the PSU banks should be able to compete with their private and international peers more effectively.
(The author is Director, National Institute of Banking Studies and Corporate Management, Noida)