“In terms of balance sheets, the cleanup has already been done. We came into the crisis with fairly strong balance sheets. So, there was not much of a residue that has to be addressed during the last one year. The anticipation was that the pandemic would result in completely broken corporate balance sheets and consequently, banking balance sheets, (but that didn’t happen),” Kamath said at the
ETMarkets Global Summit. The virtual event, which kicked off on Wednesday on www.etmarkets.com, runs through January 22.
The assessment goes against the warning of RBI’s Financial Stability Report earlier this month that said gross NPA ratio of public sector banks may rise by 650 basis points to 16.2 per cent by September 2021 under the baseline scenario. And, if the situation worsens, the ratio may rise to 17.6 per cent, RBI said.
It should also be noted that the Supreme Court has barred financial institutions from declaring non-performing assets (NPAs) until further orders and as such the true picture of the bad loans accumulated during the pandemic is yet to be out.
Kamath said one should overreact and talk about bank capitalisation and cleanup, which he believes has already been done.
“Hand-holding might be required, but that is completely different from cleanup. Recapitalisation of banks (by the government) has been done, and nothing has been broken, because banks have been prudent and continue to make provisions. Having said that, had a large number of corporate restructuring happened, there would have been noise in the market. There is no noise in the market,” said Kamath.
The market also seems to agree with Kamath that bad loans may not be as bad as feared earlier. Nifty PSU Bank Index has surged over 50 per cent in last three months. But the index is yet to reach the pre-Covid level, and is down 18 per cent on a one-year basis. In comparison, Nifty Private Bank Index is up 32 per cent.
Kamath said despite their inefficiencies and declining market shares, public sector banks will play an important role in the India growth story. “PSBs are going to be an important part of our banking system. We cannot wish it away, neither should we. Strong PSBs are required to meet our aspirations at least for next five years’ growth,” the seasoned banker said.
He, however, recognised that private sector banks have shown more efficient capital generation and capital utilisation compared with their public sector peers. “These are not shortcomings, but areas of improvement for the PSBs,” he said.
Kamath said corporates today focus more on reducing debt, as debt-to-equities ratios for top 50 companies have come down sharply compared to the 1990s. He said India Inc used profits to deleverage even during pandemic.
“Who will fund growth going forward? Probably the first time in our economic history, corporations are generating enough cash to expand brownfield projects and fund greenfield ones, with some debt from outside. We saw other ways around in the past,” said Kamath.
Kamath said the government identified the small and medium enterprises as risk areas during the pandemic and helping them has worked. But still there would be some pain points.
“It is not that there won’t be any pain in the immediate future and over the next five years. We know where those areas of pain are going to be, and gentle hand holding will be required,” said Kamath, who was previously chairman of Infosys and non-executive chairman of ICICI Bank.