The positioning of the public sector banks (PSBs) could further weaken in the wake of stricter implementation of the prompt corrective action (PCA) framework by the Reserve Bank of India (RBI), according to a research report by Edelweiss.
“Deterioration of asset quality and capital ratios amid loss reporting raises an alarm for further recapitalisation in near-term,'' the report said. The government’s recent recap programme would be primarily utilised for balance sheet clean-up and meeting minimum regulatory capital ratios of weaker banks,” it added. “Resolution of stressed assets will play a critical role in bringing down losses. Vulnerability under PCA framework and lending constraints will see private banks and corporate NBFCs (non-banking finance companies) wresting market share from PSBs,” the report said..
The year 2017-18 saw deterioration of asset quality and capital ratios of these banks. They also reported loss. All these, according to Edelweiss report, indicated the following:
1. Eleven banks already under PCA (20% of overall system advances) will see the regulatory noose tighten as they transition to higher risk threshold.
2. Likelihood of five more banks coming under PCA (constitute another 16% of advances). This scenario raises an alarm. May be further recapitalisation is the need of the hour.
3. Global scene indicates that in the U.S., over 40% of banks under PCA have failed, and of the balance, over 70% continue to be under PCA for over 3 years.
“In perspective, we believe the prevalent scenario is favourable for private banks to wrest market share from the PSBs due to marginal stress and comfortable capital ratios,” the report said.
“While the PSBs continue to dominate the Indian banking sector with 67% market share, their positioning is at risk, given that currently 20% of the market accounted for by 11 banks are already under PCA, with further 16% (five more banks) vulnerable to PCA in near-term. Pertinently, deteriorating financials suggest that some of the banks could transition to higher risk thresholds (RT) amid further restrictions. Juxtaposing the banks’ FY18 performance with RBI’s risk thresholds suggests currently four banks are under RT-1 (low risk), nine under RT-2 (medium risk) and three potentially under RT-3 (high risk). Going by what happened to Dena Bank and Allahabad Bank recently, we expect eight more banks to potentially face lending constraints (cumulatively form over 20% of market),'' the report said.
