Open Letter to Finance Minister Jaitley on Indian Banks

January 22, 2016 · Author: · Category: bank 

Everybody knows the Indian Banking System is under severe stress and here is an open letter to Finance Minister Mr. Arun Jaitley in the Narendra Modi led Government. The Author of this letter is Mr. Suresh Ganapathy Banking Analyst with Macquarie Capital Securities.

Dear Mr. FM – What are you going to do with the banks? A burning question in the minds of investors, markets, analysts etc is – what is the end game for PSU banks? Sir, the PSU banks, which control 70% of the banking
system assets, are in a bad shape with already reported gross stressed assets at ~14% of loans as of Sep-2015 vs. CET1 of ~8%. This doesn’t include large corporate group accounts, SDR and 5.25 assets which could easily amount to another ~10% of loan book. Economic recovery is unlikely unless the banking system woes are addressed and we would urge you to come out with some immediate solutions.

The world over, when the banking system has gone broke, governments have stepped in to set up a bad bank to
buy all bad assets. These measures have given the markets confidence that banks’ balance sheets are clean, allowing the banks to raise equity, kick start the credit cycle and enable a recovery. China did this a decade ago and so
have many other emerging and developed markets in the recent past. So we are surprised that your minister of state for finance, Mr Jayant Sinha, has explicitly ruled this out and suggested NIIF as an alternative route (Source:
Mint). The NIIF was proposed in the Feb 2015 Budget and it has been close to a year and we are yet to see NIIF getting operationalised.

It is surprising that the RBI has announced a clean-up of balance sheets but the government hasn’t made its stance clear on the capitalisation aspect and ability to take care of such large write-downs…

We are surprised that the PSU banks are still paying dividends in these times. Why pay dividends and then again come back to you asking for more capital? We have never understood this logic of PSU banks paying dividends when their capital position and underlying asset quality is so weak.

Will anybody from the Narendra Modi Cabinet care to respond to the issues raised by Mr. Suresh which is also on the minds of many Institutional Investors / Bankers or is the Government Blank on this subject ?

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