India's state banks have their begging bowls out again, less than a year after the government approved a $32 billion bailout.
Five of the country's 21 state-owned banks this week requested urgent cash injections as they seek to meet regulatory capital requirements, the Ministry of Finance said on Wednesday.
For investors, the health of the state banks – or lack of it – is of crucial importance as the government of Prime Minister Narendra Modi seeks to overhaul the country's lagging infrastructure and promote economic development ahead of next year's elections.
“The credit flow for smaller privately backed projects may suffer for the next two to three years,” said Srinivasan Subramanian, managing director and head of institutional equities at Axis Capital, told FinanceAsia by telephone.
India plans to spend some $92 billion on infrastructure projects for this fiscal year, of which some 42% will be funnelled by the federal government through its state banks. The remainder will come from individual states, making up 40% of state expenditure.
But with 19 of the 21 state banks reporting losses in the 2017/18 fiscal year – totalling $12.6 billion – and banks reeling under the pressure of non-performing assets, capital for infrastructure work is in danger of drying up.
The immediate problem for banks is the requirements of the Reserve Bank of India's Prompt Corrective Action (PCA) framework. Under revisions to the framework in 2017, banks that fail to meet thresholds for capital adequacy, asset quality, leverage or profitability face restrictions on dividends, branch expansion and – in some cases – lending, based on the regulator's discretion.
Now, 11 state banks operate under the PCA with three more, including the country's third largest, Punjab National Bank (PNB), understood to be at risk of joining them.
While the finance ministry has not identified the five banks seeking extra support, Subramanian said PNB, along with Allahabad Bank, Corporation Bank, Indian Overseas Bank and Andhra Bank, would receive $1.3 billion in government funding to ease capital shortfalls.
This comes on top of the $13 billion state banks received in January, through recapitalisation bonds and direct cash infusions. However, with the remainder of the $32 billion bailout not due to come through until the next financial year, original estimates of the sums needed to keep banks on a solid financial footing now look inadequate.
The infrastructure bill
Although it may be a little too early to forecast how the banking woes will affect infrastructure spending going forward, figures from the first half of 2018 are not encouraging.
According to the Centre for Monitoring Indian Economy, a Mumbai-based think tank, projects worth $204 billion were scheduled for completion in 2018-19 as of the end of March.
However, updated information available for June 2018 shows projects worth only $182 billion are due to be finished.
The centre's data also shows a slowdown in the rate of completion of infrastructure projects.
In a typical year, the centre's data shows, about 6% of projects under implementation are commissioned for use; for 2017-18, this figure fell to 4.5% per cent. For this year so far, it has fallen again, to just 2.6% on an annualised basis.
To be sure, not everyone is pessimistic. In a March report, BMI Research maintained a positive outlook for the construction industry in India.
“India’s construction industry will continue to grow at strong rates over our five- and 10 -year forecasts, driven by stable government support for infrastructure development and expanded private involvement in key sectors and public-private partnerships,” researchers said in the report.
The Road Ahead
State banks will continue to play a significant role in infrastructure spending in years to come as the government continues to push its modernisation agenda. That's despite recent regulatory changes that opened up sectors such as power to private and foreign investors.
That increases the urgency of finding a sustainable, long-term solutions to the woes of the state banking sector instead of reliance on short-term relief through government handouts.
The sheer number of state owned banks and the fact they vary considerably in size have been mooted as key reasons for their debt problems.
“There is a growing consensus within government and many people that it is better to have fewer and larger state-run banks in the future” Axis Capital's Subramanian said.
And there is already a growing trend of state banks losing market share to the private banking sector.
Figures from the Reserve Bank of India show that state banks held a 68.1% share of the credit market in 2016, down from 83.5% in 1972.
Subramanian sees this trend accelerating dramatically in the next ten years.
“The trend is that public sector market share loss will accelerate and my guess is that in less than 10 years their market share will be significantly less than 50%,” he said.
For now, state banks operating under PCA may see their ability to fund ambitious infrastructure projects severely curtailed at a time when the government wants to build 20,000km of roads in the next two year and create 100 smart cities in the next five years.
If more banks are put under the supervision of the PCA, the pool of credit for infrastructure may shrink even further.
And that may be the catalyst for the government to finally make wholesale changes to the banking system.
