This is ominous given the fact that spreads have declined across all bank groups and that the Centre has contributed till date Rs 20,446.12 crore in recapitalising banks. The combined spread of 27 state-run banks fell to 2.81 per cent in 1998-99 from 2.91 per cent in 1997-98. In the case of the State Bank of India and its 7 associates, it stood at 2.85 per cent, down from 3.14 per cent. There was a marginal improvement in the spread for other state-run banks to 2.79 per cent from 2.78 per cent. With respect to old private sector banks, spread stood at 2.16 per cent (2.57 per cent), new-generation banks at 1.98 per cent (2.23 per cent) while in the case of foreign banks, the same is at 3.47 per cent (3.93 per cent).

Interestingly, the Reserve Bank's report does not give spreads post-adjustment for interest earned on the re-cap bonds. Post-adjustment figures pertain only to net-profits and operating profits. As a result, other statements in the Reserve Bank report gets skewed: the fact that operating profits of 19 nationalised banks grew by 7 per cent to Rs 5,929.44 crore from Rs 5,541.40 crore.

In the case of operating profits, the cumulative post-adjustment figure is Rs 3,969.58 crore, down from the Rs 5,929.44 crore. This lack of adjustment for interest on re-cap bonds across other parameters gives a misleading picture of a state-run bank's health. To illustrate: in the case of Bank of India, the spread fell 16 basis points to 2.61 per cent from 2.77 per cent, but the fall in net-profit post-adjustment is to Rs 4.57 crore, down from Rs 167.94 crore! The Report says that gross non-performing assets (NPAs) to gross advances of scheduled commercial banks increased to 14.6 per cent (14.4 per cent) while net-NPAs to net-advances increased to 7.5 per cent (7.3 per cent). The increase was also evident in obsolute terms: to Rs 58,554 crore, an increase of Rs 7,739 crore. The Report, in a cross-country comparison of NPAs points out that ratio NPAs to total loans of state-run banks is 19.5 per cent. This compares to the 14.8 per cent in Mexico, 10.75 per cent in Argentina, 11.2 per cent in Indonesia and 8.2per cent in Malaysia.

The Reserve Bank though adds that the figures are not strictly comparable as in India an advance is classified as a "loss" the moment it becomes uncollectable; available securities are not deducted from the doubtful advance; and 100 per cent provisioning is done on the unsecured portion.The Report also has for the first time included stock market behaviour of bank scrips and attributes the hammering of the scrips in the secondary market to their poor performance in general and concerns over NPAs. As on March 31, 1999, shares of eight state-run banks and that of 17 private sector banks were listed on the National Stock Exchange.

During 1998-99, bank scrips listed on the bourses showed a significant decline in their prices, affecting market capitalisation and market turnover of the scrips.

Market capitalisation of all trade bank scrips on the nse was Rs 19,561 crore in 1998-99 compared to Rs 28,332 crore in 1997-98. Scrips of state-run banks, which declined significantly were those of Bank of Baroda (54.5 per cent), State Bank of Travancore (54.4 per cent), Bank of India (52.4 per cent) and State Bank of India (23.6 per cent).INSIGHT
Barely a handful of the recapitalised banks could report only a small variation in net after removing interest earned on re-cap bonds. Most reported steep variations, and in chronic cases even losses. While the spreads are under pressure uniformly given lending constraints, it is the operating costs that make the difference between profit and losses, after removing the re-cap bonds interest. This shows the lack of effectiveness of past policies. To that end, the present policy of doing away with the re-cap option is the right one and should lead to reform in the banking sector.

Aaron Chaze