Banking Sector Faces Shake-Out From Freer Re
The banking industry will see a major shake-out if the Tarapore Committees recommendations to make the rupee fully convertible on the capital account are implemented, bankers and analysts said. Banks profits will come under pressure, Kiran Nanda, economist at Gujarat Ambuja Cements said.
After the full float, Indian firms will have freer access to cheaper offshore funds, which will mean greater competition and thinner margins for Indian banks, she said. Lending opportunities for Indian banks may be curtailed, said Ramesh Sobti, India chief executive of ABN-AMRO Bank. The state-run banks will continue to have the advantage of low cost of funds from their large retail network. They have resources, but credit lending expertise will come under sharper focus, Sobti said. Some banks may be reduced to deposit-taking firms while others with expertise may develop into lending banks, he said. Many banks will report huge losses if the recommendations are implemented, S R Krishnan, banking analyst at Peregrine Capital India said, referring to some of the recommendations. But the surviving banks will become healthier and show better earnings after the initial trauma, he said.
The major issue is the preponderance of NPAs in some of the major banks. That is certainly going to put some of them in a straitjacket, but it is not insurmountable, said a senior credit officer at a major foreign bank in Mumbai. Indias asset classification and provisioning norms are liberal by international standards. But the clean-up is already under way and banks have taken hits on their bottom lines during the past two financial years to improve their NPA and capital adequacy positions.
Currently, 19 of 27 state-run banks, which dominate Indias banking industry, have achieved the capital adequacy norm of eight per cent. If the proposed capital adequacy norms are implemented, the capital adequacy ratios will drop sharply, bankers said.
The options facing the government would be to recapitalise the troubled banks or allow them to shut shop, said Peregrines Krishnan.While the latter option will be politically inexpedient, the former option would require large capital injection of almost Rs 140 billion by the government, he said. That would cost the government about 12 per cent of the current fiscal deficit, or 0.6 per cent of gross domestic product. Recapitalisation through the capital market would be difficult for the troubled banks. (Reuter)
Mergers of weaker banks with stronger ones are a possibility, but would be cumbersome and time-consuming.
To deal with sickness in the banking industry, the committee hinted at the need for steps to curb the growth of sick banks. It said these banks should not be allowed to grow.
Analysts said the recommendations will pave the way for cleaner bank balance sheets and help bank customers corporates as well as individuals who will have avenues to invest abroad if they are not happy with local banks.