McKinsey pegs provisioning need of banks at Rs 6 lakh cr

McKinsey & Co said on Wednesday the current provisions of Indian banks were inadequate and there was a gap of at least Rs 6 lakh crore that should be filled to provide for stressed assets.
 
The consulting agency released a blueprint for Indian banks for the next five years, in which it said stressed assets have already grown past the net worth of the banks.
 
According to the agency, gross non-performing assets and restructured assets amounted to Rs 9.88 lakh crore by FY16, growing 25 per cent year-on-year from 2013. If bad debts continued to pile up, the “entire equity base of the banks could be at risk,” the consultant said. Four sectors — power, textiles, EPC (engineering, procurement and contracting), basic materials iron and steel — contributed more than 80 per cent of the total bad loans for the banks.

 

“Public sector banks account for more than 80 per cent of the stressed assets load, well over their net worth,” McKinsey said, adding that state-owned banks would have to simultaneously bear the burden of major write-offs and also expect significant lead time before the quality of their loan book improve.
 
Corporate borrowers accounted for about 80 per cent of these stressed loans. In 2016, the total debt of 10 of the largest corporate houses grew to Rs 7.67 lakh crore, accounting for 36 per cent of all corporate loans.
 
“The situation warrants extensive institutional interventions,” it said, adding the banking sector might need Rs 1.85-2.75 lakh crore of additional capital support till FY22 to manage their business.

 
The consultant also suggested a model where a hybrid model of consolidation in banks can be pursued, in which there would be one or two banks with global scale and footprint. Public sector banks should be merged to build national heavyweights. The remaining public sector banks should be converted to niche banks with focused presence.
 
“This would ensure that three to five such banks are created that have a sizeable global or national presence and offer a full range of commercial banking services to a broad cross-section of corporate, SME, international, retail and mass banking customers. The remaining banks should have two options: To continue under government ownership but eschew large corporate lending and specialise as niche banks with a focus on select products or geographies largely for retail and SME customers, or, alternatively, to shed their public ownership,” McKinsey added.