If wouldn't be wrong to say that the Rs 160 lakh crore assets size banking industry witnessed maximum transformational changes in 2019. The biggest of all was the government's move to create 10 large public sector banks from over two dozen entities. The bankruptcy code has also opened a new avenue for banks to recover money from defaulters. The new CEOs at private banks have also settled. The asset quality deterioration continued with some relief as non-performing assets (NPAs) seem to have peaked as of now. There are areas of concerns as well that will persist going into 2020. Here goes a brief overview:
Five major highlights
Structural change in the banking landscape
The PSB universe will now have half a dozen large banks with Rs 10 lakh crore-plus balance sheets, two national banks and four regional banks. This would help in better control (from owners, the government ) and in creating niche segments rather than all banks replicating each other in terms of business mix.
Privatisation of IDBI Bank
It was not easy to utter the word 'privatisation of PSB' in the past, but the BJP-led NDA government has taken a bold step in handing over the IDBI Bank to Life Insurance Corporation (LIC). The insurance major is now the owner of IDBI Bank. This will free up the bank from the clutches of government and provide the much-needed capital from the insurance giant for growth.
Deterioration in asset quality arrested, finally
After seven long years of deterioration in asset quality, especially of corporate loans, banks are looking forward to a clean slate to start with. The rising NPAs in the past have resulted in eating away of the capital and lower profitability because of higher provisioning. The bankers must have learnt from the bad experience. The time now is to strengthen the credit standards.
Back in the green
After two successive years of losses, the banking sector returned to profitability in the first half of 2019-20. The 94 scheduled commercial banks together clocked losses of Rs 23,397 crore in 2018-19 and Rs 32,438 crore in 2018-19.
Capital Infusion by the government
The government has infused capital worth Rs 1,06,000 crore in the current financial year in PSBs. With asset quality showing a reduction in NPAs, banks will now start funding the growth, especially via retail lending, followed by corporate lending as and when things start to look up in the economy.
Five major areas of concerns
A BOB experiment abandoned midway
The government experimented with Bank of Baroda (BOB) by bringing in outside talent. The bank actually saw huge transformational changes over the last three years. The idea was to create a template for all PSBs after experimenting with BOB. After Chairman Ravi Venkatesan and MD & CEO P S Jayakumar left the bank this year.
Danger in retail assets
After the corporate lending collapsed few years ago, banks were quick to switch to retail assets. The RBI has now warned that the slowdown in private consumption spending has imposed limits to this growth strategy even as the possibility of defaults among retail segments rises as growth slows down.
Payments bank failed
The year also saw some of payments banks closing down their operations while others raised questions over the viability of the payments banking model. The RBI also refused to provide any relaxations sought by the banks. The options for payments banks are now limited - shut down or convert into small finance banks. Will RBI oblige?
Rising frauds and technical glitches
The frauds in the banking industry are on the rise and customers also fear technical glitches impacting the banking services. The recent technical glitch at HDFC Bank went on for two successive days.
New compensation guidelines for CEOs
The new compensation guidelines issued by the RBI for CEOs put restrictions on how much of variable pay one will get and also the clawback of bonuses and future variable component in case of bad performance. These rules will certainly make the bankers risk-averse. CEOs will think twice before chasing the growth or taking positions in the new sector.