Skip to main content

The changes banks need

  • It is now clear that the markets were right. They never believed the PSB numbers and thus refused to recapitalise them. Ultimately, the RBI had to force the banks to come clean. Having been lied to for years, it is but natural that investors don’t believe the government’s contention that after fully recognising all asset impairments no significant bank will breach its minimum core capital requirement. Nobody believes that the capital the government has already committed to the PSBs will be enough to get them through the Basel changes, recognise their asset impairments and fulfill their growth needs.

  • If the authorities are so confident of their numbers they should disclose their assumptions. What is the true extent of asset impairment, and based on what stress assumptions? How much is this hidden capital, property etc that the banks have? What are they assuming for loss given default? How much of the restructured and SDR book are they assuming goes bad? What are the commodity price assumptions in their models?

  • As I have written before, in the absence of data, markets will assume the worst. Markets detest uncertainty. If the authorities genuinely believe that investors are over reacting and too bearish, then release the data of the AQR, let investors see the numbers and the assumptions used. If there is fear that the numbers will spook retail depositors, that seems unlikely — as already in this quarter 11 PSBs have reported losses and the sector as whole reported a loss, but there seems to be no panic. There can hardly be any political fallout as these bad loans did not originate in the period of the National Democratic Alliance government. Why the hesitation to release the data? Investors will automatically assume that things are actually much worse than is being discussed.

  • We are going to need the markets to help us recapitalise the PSBs; the government does not have the money to do it all on its own. In the absence of information on the true asset quality, investor support will not be forthcoming. Bank of Baroda (BoB) was rewarded with a 25 per cent price spike after its earnings call, as investors felt it had come clean on asset quality. Rather than slamming the stock further for the large write-offs, investors were happy to know the true picture and thus value the core franchise and factor in the legacy asset problems. Greater clarity will allow investors to do the same for other large PSBs.

  • The second prerequisite for investor support beyond greater disclosure on asset quality is management change. No one is going to give money to the management/governance framework which led to this mess in the first place. BoB has to be the template. Bring in qualified individuals and give them an empowered and credible board to shield them from Delhi. The finance ministry has talked of this, but it all seems to be taking too much time. Fighting vested interests is not easy, after all.

  • This is not a banking crisis. Our private banks are fine, most will not need capital, and those that do have access to the markets. The PSBs are in trouble, undoubtedly, but the public sees them as backed by the government. There will be no retail panic.

  • This gives us the time and opportunity to clean up and reform their governance, management and culture. Use their need for external capital to force change. This is a real opportunity to address an Achilles heel of our economy and set it fundamentally right. The authorities must be commended for starting down this road of reform. The quicker, the better.

Comments

Popular posts from this blog

India Tech Vision-2035

India Tech Vision-2035 India's technology thinktank under the ministry of science & technology has come out with `Technology Vision 2035' here at the ongoing Indian Science Congress, identifying the challenges ahead and how they can be dealt with through technological interventions while realising the dream of a developed India by the year 2035. The thinktank -Technology Information, Forecasting and Assessment Council (TIFAC) -in the vision document lists a technology roadmap for India, giving details of 12 sectors and technologies that in some cases exist but need to be deployed, some in the pilot stage that must be scaled up and technologies in R&D stage. It, in fact, talks about many future technologies, ranging from flying cars, real time translation software, personalised medicine, wearable devices, e-sensing (e-nose and e-tongue) to 100% recyclable materials among others which may be used in different areas to solve day-to-day problems “The trajectories del...

SWACHH BHARAT MISSION

SWACHH BHARAT MISSION Prime Minister Narendra Modi launched the Swachh Bharat Mission (SBM) on October 2, 2014, the birth anniversary of Mahatma Gandhi. The ambitious programme aims to make the streets, roads and infrastructure across the country clean by October 02, 2019, the 150 th  birth anniversary of the Father of the Nation. It is India’s biggest ever cleanliness drive. The relevance of the Swachh Bharat Mission Sanitation has emerged as a key issue since the 2011 Census highlighted e glaring data on lack of toilets in the country by stating that over 26 million people in India defecate in the open. Launched with an estimated cost of around Rs 62,009 crore, Swachh Bharat Mission aims to achieve the elimination of open defecation in the country. Among its other objectives are conversion of insanitary toilets to pour flush toilets, putting an end to the inhuman practice of manual scavenging and carrying out Municipal Solid Waste Management (MSWM). Involvem...

12 April is Observed as International Day of Human Space Flight

12th April is being observed as the International Day of Human Space Flight to commemorate the date of the first human space flight in the history of mankind every year.  In 1961 Yuri Gagarin, a Soviet Union (USSR) cosmonaut undertook first successful first human space flight on this day. And this historic occasion had opened the way for space study for the benefit of all humanity. This historic day is celebrated as Cosmonautics Day in Russia and some other former USSR countries. This year 2016 is 55th anniversary of First Human Space Flight. Background After UN General Assembly had passed its resolution A/RES/65/271 of 7 April 2011, United Nations (UN) had declared 12th of April as the International Day of Human Space Flight. The main objective behind international celebration of this day is to memories each year at the international level the beginning of the space era for mankind. It also aims to reaffirm the important role of space science and technology...