India Shifting Capital Support to Target Most Profitable BanksVrishti Beniwal and Anto Antony
India’s support of state-controlled banks is shifting to target the most profitable lenders for capital injections, rather than propping up weaker peers, as the nation seeks to build a more robust financial system.
Amid reduced government support, weaker lenders could look to limit operations to a particular business segment to boost profitability, Financial Services Secretary Hasmukh Adhia said in a March 3 interview. The Bank Board Bureau, an advisory arm to be formed within five months, may be able to “nudge” some of these banks to merge with competitors, he said.
In its annual budget unveiled Feb. 28, the government put aside 79.4 billion rupees ($1.3 billion) for state-owned banks, a regular practice to bolster capital at lenders prevented from selling stock so as not to dilute government shareholdings. More than 40 percent of the 69.9 billion rupees allocated for the fiscal year ending this month was given to State Bank of India, the nation’s biggest bank, which boosted profitability over the second half of 2014.
“As an emerging economy, we also would like to have a few large banks like China,” Adhia said from his office in New Delhi. “One of the steps we can take in that direction is to make some of our strong banks stronger, and that’s why the capital allocation criteria was changed.”
The average profitability at state-run lenders, as measured by return on assets, was 0.5 percent as of last March, the lowest in at least seven years, data compiled by the Reserve Bank of India show. State Bank’s return was 0.65 percent at the time and improved to 0.68 percent by December, exchange filings show.
The Indian lender had assets of about $400 billion at the end of September, about an eighth of the total held by Industrial & Commercial Bank of China Ltd., according to Mumbai and Hong Kong exchange filings. ICBC is the world’s largest bank by market value.
The government hasn’t disclosed individual allocations for the money set aside as capital for public-sector banks in the coming fiscal year. The allocation of capital among the 27 state-run lenders “will be purely on the basis of efficiency parameters so that banks start focusing on these,” the finance ministry said in a statement last week.
Indian Bank and Bank of Baroda are the government lenders with the highest three-year average returns on assets, while United Bank of India and Central Bank of India have the lowest, according to a Feb. 27 report from Barclays Plc.
The ministry estimates government banks will need an additional 2.4 trillion rupees by 2018 to comply with Basel III requirements that are aimed at boosting their capacity to absorb losses.
The government said in December it will cut its ownership in the banks it controls to as low as 52 percent to help them raise capital. By paring down the state holdings, which range from 56 percent to more than 80 percent, the banks will be able to raise as much as 800 billion rupees at current prices, Adhia said in the interview.
The budget also proposed the formation of the Bank Board Bureau, an independent body that will help advise state lenders on measures to raise capital that may include selling non-core businesses, Adhia said.
State-run banks’ profitability has been eroded by surging bad loans and slowing credit growth. The banks’ stressed assets rose to 12.9 percent of lending as of Sept. 30, the highest since 2001, RBI data show. The ratio was 4.4 percent for privately owned banks. Loan growth at state lenders in the year ended Sept. 30 trailed total lending by Indian banks by 2 percentage points.
Stressed assets “are a legacy issue,” Adhia said. “Projects got stuck because of land availability, gas pricing, environment issues. We are trying to work out wherever policy decisions of government can help.”