Viral Acharya, deputy governor of the RBI, may not have the star power of a Raghuram Rajan. But he shares the former governor’s penchant for saying what he thinks. Acharya, 43, on a sabbatical from being the New York University’s economics professor, is also known in academic circles for his out-of-the-box thinking. And that skill will be needed in copious measures to save the state owned Indian banks from their current plight.
Saddled already with a problem of non performing assets, Indian banks have to beef up their capital by the end of March 2019 to become Basel III norms complaint. The norms, developed by Bank for International Settlement (BIS), lay down rules for banking hygiene – minimum capital requirement, banking supervision processes and enforcement of market discipline.
International credit rating agency Fitch Ratings’ latest estimates that Indian banks will require an additional $65 billion to meet the capital adequacy norms outline in Basel III. To see to it that banks achieve this target is also the responsibility of the banking regulator, the central bank in this case.
If that does not happen, Fitch cautions that weak capital positions could have a major negative influence on Indian banks’ Viability Ratings, which represents the capacity of the bank to maintain ongoing operations and avoid failure.
“Prospects for internal capital generation are weak and low investor confidence impedes access to the equity capital market,” Fitch says in a report. Investor confidence in banks is already low. Delhi-based Prime Database says between April and August, 26 share offerings raised Rs 21,560 crore, but none of them were banks. The solution? Reserve Bank of India deputy governor Viral Acharya hinted in a speech this month that state-owned banks might be restructured, merged and even pushed to merge to take them to safety.
With bleak prospects of raising capital from the market, public sector banks are likely depend on the government to meet core capital requirements, adds Fitch. The agency says the government is committed to investing only another $3 billion in fresh equity for 21 state banks over FY18 and FY19, having already provided most of the originally budgeted $11 billion. In contrast, Fitch estimates that 95% of US$ 65 billion capital will be required by state owned banks.
Acharya said in his speech that restoring public sector bank health in India is the most important agenda in the journey that the RBI has embarked upon. “When bank balance-sheets are so weak, they cannot support healthy credit growth,” Acharya said.
Put simply, under-capitalised banks have capital only to survive, not to grow. Acharya underlined the seriousness of the matter: “We have created a due process for stressed assets to resolve but there is no concrete plan in place for public sector bank balance-sheets; how will they withstand the losses during resolution and yet have enough capital buffers to intermediate well the huge proportion of economy’s savings that they receive as deposits?”
Acharya is already asking some hard questions. “Why aren’t the bank board approvals of public capital raising leading to immediate equity issuances at a time when liquidity chasing stock markets is plentiful? What are the bank chairmen waiting for, the elusive improvement in market-to-book which will happen only with a better capital structure and could get impaired by further growth shocks to the economy in the meantime?”
Acharya pointed that the union cabinet has also authorised an alternative mechanism for approving amalgamation of public sector banks. The framework envisages initiation of a merger proposal by the bank boards based on commercial considerations, which will be considered for in-principle approval through what is called an “alternative mechanism”.
“This could provide an opportunity to strengthen the balance sheets, management and boards of banks and enable capital raising by the amalgamated entity from the market at better valuations in case synergies eventually materialise,” Acharya added.