More headroom for banks, but investors unimpressed

MUMBAI: Shares of most public sector banks (PSBs) closed in the red on Monday despite an announcement by the Reserve Bank of India (RBI) that it will give them more time to raise capital to meet international norms. The RBI board also decided to grant relief to small businesses — a move that could result in lenders not having to classify stressed loans in this sector as non-performing. Allahabad Bank was the only PSU lender to see its shares gain, while its peers lost between 2% and 5% on Tuesday.

“This will provide some breathing space to capital-starved PSBs,” said Crisil Ratings senior director Krishnan Sitaraman. “As per our earlier estimates, they needed around Rs 1.2 lakh crore over the next five months up to March 2019 to meet tier-1 capital stipulated under Basel III norms. Now they would need only around Rs 85,000 crore.”

While the RBI decision gives banks more headroom to lend, it may not inspire confidence among investors. “Just because RBI gives some regulatory forbearance for classification of SME non-performing loans or temporarily relaxes capital requirements, will credit rating agencies and equity investors start looking at them differently? When world over investors demand banks to have at least 9-10% of common equity tier-1 capital, how does it change the prospects for the bank trying to raise capital — equity or debt?” said Macquarie Capital Securities research analyst Suresh Ganapathy. He added that he was “dead against” any regulatory forbearance or relaxation of capital requirements.

Care chief economist Madan Sabnavis said that, while the surplus reserves will presumably be used for the welfare of people, the argument on the other side is that these reserves are notional and required for contingencies. “The committee will have to decide on how much of such reserves will have to be maintained and the purposes for which they should be used. Also, the effect on forex reserves and money in circulation will have to be worked out,” he said. On the proposed forbearance for stressed MSME loans, Sabnavis said that, while this will be a positive for small businesses that are facing challenges, the RBI will have to come out with guidelines to ensure that banks do this in a prudent manner. “The restructuring exercise for large loans in the past had led to the creation of the NPA pile, which is still to be resolved. Therefore, this exercise should be undertaken with the necessary safeguards,” he said.

According to Bank of America Merrill Lynch economist Indranil Sen Gupta, the move by the RBI board to support SME credit, delay 9% capital adequacy ratio requirement by a year and dilute the PCA framework is a welcome one. “For these measures to work, we continue to expect the RBI to step up open market operations (OMO) to Rs 50,000 crore a month in December-March to arrest lending rate hikes,” said Sen Gupta in a report. DBS Bank economist Radhika Rao said that the compromise between the centre and the RBI is positive for the rupee markets. “Easing tensions between the RBI and the government is likely to be positive for Indian rupee assets, particularly as the central bank is seen to retain its operational autonomy,” she said.