(Latest Op-Ed First; Verbatim Compilation of The Hindu Op-Ed;
Best to read in the order of oldest to latest article to get a comprehensive
understanding; Consider repetition to be revision)
Compiler’s Note: This issue becomes all the more relevant
given the scams that have emerged in recent times. While the government pumps
in more capital into banks, it must also ensure that leakages from the system
are reduced to bare minimum. #UPSC #Economics
Banking on
good faith: on efforts to recapitalise PSBs (29.01.18)
About ₹1 lakh crore is expected to be pumped
into India’s 21 public sector banks by March, which the Centre hopes will
enable them to extend fresh credit lines worth over ₹5 lakh crore to
spur economic activity. Of the capital injection — the first
half of an ambitious ₹2.11-lakh crore recapitalisation
programme for ailing public sector banks announced last October
— about ₹8,100 crore is from the government’s budgetary
resources. Banks are expected to tap the markets for ₹10,300 crore,
while recapitalisation bonds worth ₹80,000 crore are
to be issued to finance the rest. Leaving aside the market-raising efforts by
banks, over half the fresh capital of over ₹52,000 crore is being directed to
the 11 public sector banks that the Reserve Bank of India has placed
under the prompt corrective action, or PCA, framework. The RBI deploys the PCA to monitor the
operation of weaker banks more closely to encourage them to conserve capital
and avoid risks. For these entities, this capital offers a fresh lease of life
as it will help meet regulatory requirements under the Basel-III regime as well
as cushion them to an extent from possible haircuts on stressed loans that are
going through the insolvency resolution process. State Bank of India, the
country’s largest, and the nine others that are out of the RBI’s PCA net will
receive nearly ₹36,000 crore in order to strengthen
their lending capacity.
While announcing this package, the government has described
each of the banks as “an article of faith”. Its assertion that no public sector
bank will fail and that depositors’ money will remain safe should allay
customers’ worry about the safety of their savings under the proposed Financial
Resolution and Deposit Insurance legislation. Rating agencies have given the
move the thumbs up, but remain unimpressed about governance reforms packaged with
it. These include tweaks to existing systems for closer monitoring of
big-ticket loans, identifying niche areas where a bank has strengths,
restricting corporate exposure to 25%, and a new performance management system.
Actual capital inflows will depend on their performance on these fronts and
their ability to meet the government’s service priorities, including smoother
credit flows to small businesses. More structural reforms may well be on the
anvil in the second half of this recap plan, which RBI Governor Urjit Patel had
described as providing a real chance to meet the banking sector’s challenges
for the first time in a decade. Yet, the absence of any reference to
consolidation through mergers is glaring. Moreover, while the government has
repeatedly ruled out privatisation of these banks, the only one where it
intended to offload its majority stake, IDBI Bank,
has got the largest allocation of ₹10,610 crore.
At best, this sends out mixed signals.
XXX
Will bank recapitalisation fix NPAs? YES | ASHVIN PAREKH
This will give the banking system time to enhance its
credit portfolio
The move on the part
of the government to inject capital of ₹2.11 lakh crore into public sector banks (PSBs) is commendable and a
decisive step.
In making this move,
there was an implied acceptance that the recovery process set up through the
Insolvency and Bankruptcy Code (IBC) reform had not been working at the desired
pace. When the Reserve Bank of India asked PSBs to work on the recovery process
for 12 large exposures which account for 50% of the total non-performing assets
(NPAs) worth ₹8 lakh crore
in the banking system, it was expected that by December 2017, the banks would
recover about ₹ 2 lakh
crore. But it’s already November and we know that recovery is eluding us and the
process may take longer. Till then the banking system will starve for capital.
Capital needs
In addition, the
first few resolutions that have taken place so far have suggested that the size
of the haircuts the banking system
is expected to take will perhaps be much more than the original estimate of
about 50% of the exposure amount. This means that there will be additional loss
of capital. We are at a stage where the recovery will become more expensive in
terms of capital in the banking system. If you take a haircut of 90% then you
have to write off additional 40% of the exposure amount, and that would hurt
your capital requirement. Therefore, there must have been a view that till the
recovery process gathers momentum, more capital would be required. There is
also a time dimension associated with this equation.
The economic value,
and therefore the value recovered from borrowers, may perhaps grow after 8-10
quarters. At present, the value at which the resolution happens is sub-optimal.
The government’s decision to put more capital into the banking system could pay
off if the banking system were to hold these assets for this period.
Focus on clean-up
It is significant
that capital is being infused into banks. This could give the banking system a
good breathing time to enhance its credit portfolio and restore value out of
the NPA accounts. We may have to watch the situation unfolding over the next
three years. During this time, the regulator, banks and the government will
have to focus on the quality of public sector banking assets, the NPAs and the
recovery. There has been a broad-brush approach to the quality assessment. The
system will have to conduct more analysis, more evaluation sector-wise in terms
of its potential for value restoration and enhancement. They will have to
understand which sector is in a position to restore more economic value in six
to eight quarters. Some sectors may perhaps take longer.
The last thing the
economy and the banking system can afford is a further drop in economic value.
What may be perceived as a ₹8 lakh crore problem today might grow into a much larger amount. The
quality of governance will play a significant role in this regard. There has
not been any worth-while effort
on this unfortunately. There will have to be more reforms to put a higher order
of governance in the banking sector. Ensuring performing boards at
public-sector banks do become more critical.
The last point which
is equally important is that as long as the government wants to hold on to 51%
equity in PSBs we cannot have periodic injection by way of recap bonds.
To fund the economy,
the government will have to make a yearly budgetary allocation of the amount of
capital required by PSBs. Programmes such as Indradhanush and small budgetary
allocations will not work. The PSBs need budgetary allocation of at least ₹75,000-80,000 crore each year.
Ashvin Parekh is
Managing Partner of Ashvin Parekh Advisory Services LLP
Will bank recapitalisation fix NPAs? NO | C.H. VENKATACHALAM
When the government provides capital, it is out of
savings that people have kept in banks
The announcement of
a stimulus into PSBs has been apparently understood as a bounty for the banks.
A euphoria is being projected that the government has been too generous to the
banks and is serious about helping them to resolve the bad loans crisis. The
quantum of capitalisation announced leads one to believe so. In reality, this
will not enable banks to recover the alarmingly huge bad loans which is the
main issue confronting them.
Stressed assets
The total stressed
assets, bad loans, and restructured loans in banks are in the region of ₹15 lakh crore. From AIBEA, we have been demanding the publication of names
of defaulters and to declare wilful default as a criminal offence. Successive
finance ministers have avoided both these demands.
Instead of taking
tough action on defaulters, the NDA government came out with a “novel scheme”
to foist insolvency and bankruptcy proceedings on defaulters. This measure is
not going to result in the recovery of bad loans. That is why the RBI has asked
PSBs to be prepared for a deep haircut, up to 50% of the dues. Recently, on one
account, a bank managed to recover just 6% of the total loan amount of ₹950 crore. On 12 accounts, the dues are
₹2.5 lakh crore. One can only imagine the additional provisions banks will have
to make this year. There are more skeletons in the cupboard.
Rewarding the defaulter
But why this sudden
rush to ‘punish’ corporate culprits? The fact is that this is not a punishment,
rather it is a reward. The defaulter promoter can himself bid before the IBC
proceedings. Obviously, he is likely to be the highest bidder. So, he will
retain his company but will have to shell out less than what he borrowed. This
is legal innovation to pay less. But in the bargain, banks will lose huge
amounts. One can safely predict that all banks will be running into losses by
the end of the current financial year. Last year, while the gross operating
profits were ₹1,58,982
crore, after provisions for bad loans (₹1,70,370 crore), the net loss was
₹11,388 crore. This year, it is bound to be worse. The IBC is only a ploy to extend favours to big corporates to
escape from their liability at the cost of the public exchequer.Now let us see
whether the recap announced by the Finance Minister will help PSBs, labelled as
inefficient and incompetent. If banks would have recovered these loans, their
interest revenue would have been more, income levels higher, profits high and
they would have generated capital internally out of the profit. That door is
closed because banks cannot recover loans through the IBC route. Thus, the banks’
capital gets eroded and the capital adequacy ratio (CAR) becomes adverse.
Lending requirements
If banks do not have
adequate capital, they cannot lend. This would dampen the economy, which is
already in the doldrums. If there is an economic crisis, the next elections
will be a question mark for the NDA. Hence to bolster the economy, banks have
to be advised to give more loans. To give more loans, more capital is
essential. That is why the announcement on recapitalisation.
In the last three
years, banks have written off ₹1,88,287 crore. We have to bear in mind that when banks lose money or
when the government recapitalise PSBs, it is all people’s money and out of
public savings kept in trust in the banks. People’s money should be for
people’s welfare and not to fund
corporate default or to recapitalise the banks to adjust these bad loans.
C.H.
Venkatachalam is general secretary of the All India Bank Employees’ Association
(AIBEA)
Will bank recapitalisation fix NPAs? IT'S COMPLICATED | D.K.
MITTAL
A welcome step, but it is a very temporary solution and
only treats symptoms
The decision by the government to further capitalise public
sector banks is a welcome move. But does it really solve the problem of the
lack of capital adequacy of public sector banks? Let us examine.
Too many infusions
It is the fourth time since the mid-eighties that PSBs are
being infused with substantial capital due to high NPAs (15-20 %). The Net
Present Value (NPV) of capital infused by the government in PSBs would be well
over ₹10 lakh crore. If capital infusion was the
solution, why is it happening again and again? As it turns out, it is a very
temporary solution and only treats symptoms and not what causes these symptoms.
The recurrence is because of two sets of issues: governance
and regulatory framework. For improving governance of PSBs, questions like the
tenure of senior management have to be addressed. This was the recommendation
of the Narasimhan Committee of 1991 and 1998. Public Sector Bank chiefs and
their managing/executive directors must have a fixed tenure of at least five
years. The second issue is the salary structure of senior management. The
amount of remuneration they get and the kind of political and economic
influence their decisions have are nowhere comparable to what happens
elsewhere. To offer incentives by way of very good annual bonus based on
performance should enable them to take the right decisions.
Adopt best practices
The third issue would be of professionalisation through
lateral entry at the level of general managers and not at the ED/MD level.
Fourth, the banking boards need to be manned by professional directors rather
than political nominees. Last, accountability needs to be fixed by removing
senior management for non-performance.
There are a few gaps in the regulatory framework as well.
One of them is joint lending. Borrowers borrow from one bank and go to another
and borrow money. Banks do not talk to each other. Also, there are issues in
getting loans approved for large projects. Borrowers have to run to 20 banks to
get a sanction, which is uneconomical, costly and leads to corrupt practices as
bank officials seek favours to agree to a proposal. We need to adopt some best
practices by creating a framework for funding of projects (over a size) to be
undertaken by one bank which downsells it within a period of, say, 90 days, but
could breach exposure limits in that period.
Another issue is the appointment of statutory auditors. In
the best private sector companies, the auditors are shortlisted by promoters
and then assessed by the Audit Committee and Board. Also, in case of wrong
reporting, these have to be punished by at least prohibiting them to audit any
financial entity regulated by the RBI, the Securities and Exchange Board of
India, the Insurance Regulatory and Development Authority and the Pension Fund
Regulatory and Development Authority.
And last, action must be taken against promoters who have
siphoned off funds and transferred them to their personal assets. These assets
must be forfeited and the RBI needs to move ahead on that.
Quick action plan
To fix NPAs, we need, in addition, resolution of the above
issues, a quick action plan. First, NPA cases caused by the cyclical nature of
the sector need to be supported if there are no issues with fund utilisation.
For other cases, the right approach would be to do what we
did for UTI 64 in 2000-01. Also, we need to deal with NPAs sector by sector
like power, roads, steel and so forth. We need to pick NPAs from PSBs of each
sector, park them in one place by creating an entity like a SUUTI (specified
undertaking of the Unit Trust of India), fund the banks and invite
international and national investors to dispose of the assets.
In sum, this infusion is a welcome step but there are issues
that should have been dealt with first. The good part is that after putting
this capital, the government’s equity would be close to 70-80% in each PSB. The
government could make a huge profit by selling this equity after improving the
management of PSBs.
D.K. Mittal is a former secretary in the Department of
Financial Services
XXX
The stimulus and after (02.09.17)
The Financial Times of London described the
recent recapitalisation of public sector banks in India as collecting used
tiffin boxes. It said banks are like intermediaries, not unlike the dabbawalas
of Mumbai who deliver home cooked meals to offices, and return used tiffin
boxes back in the evening. Banks collects savings from depositors and give it
to borrowers. The intermediaries have not been collecting their deliveries back
(that is, the bad loans), and the clean-up is as messy as uncollected used
tiffin boxes!
Low credit offtake
The metaphor is a bit mixed up but catches the imagination.
A better metaphor would be “cleaning the carburettor” of the credit pipeline.
Bad loans have clogged the pipes, and new credit has stopped flowing.
One of the most reliable leading indicators of economic
growth is the growth of non-food credit. High growth in credit foretells
healthy growth of GDP, since credit goes mostly into investment and building of
new capacity. India is predominantly a bank finance-led economy, so when bank
lending slows down, it surely impacts future growth. Bank credit growth has
been at nearly a 60-year low. Even the growth of money supply is at a 55-year
low. This stark metric tells us about the growth slowdown. Of course, there are
many proximate causes as well, such as demonetisation and the roll-out of the
goods and services tax (GST).
Credit offtake slowed down because of both demand and supply
side factors. On the demand side is the fact that industry has low capacity
utilisation rates (factories lie idle); domestic industry is losing market
share to low cost imports, made worse by GST, which has tilted the field in
favour of imports, and also by the strong currency. The corporate sector is
also deleveraging and paying off its past high debts. All this means demand from
the private sector for large-scale new credit is muted.
Burden of bad loans
On the supply side, the big constraint on fresh lending is
the burden of non-performing assets (NPAs). The NPA ratio has been
deteriorating for more than six years, and worse is yet to come. The diagnosis
of worsening NPAs reveals five different causes, not all caused by the bankers
themselves. The first is the disproportionate share of loans that went to
infrastructure. These projects are of long gestation and long payback period,
so unsuitable for bank lending. That creates an asset liability mismatch for
banks, since the liability side is of a short-term nature. During the UPA
regime, public-sector banks were under pressure to fund the ambitious $1
trillion infrastructure vision. Normally such projects ought to be funded by
long-term bonds or developmental organisations like the World Bank or the Asian
Development Bank, or the IDBI in its original avatar. But in the absence of
those options of development finance, it fell to public sector banks to provide
infrastructure finance. This led to over-exposure.
The second reason for deterioration of loans could be the
impact of key judicial decisions like abrupt cancellations of coal mines and
spectrum allocation. When the same were re-allocated through expensive
auctions, it proved to be a fatal burden on respective business models of
power, steel and telecom. The third reason for worsening NPA ratios could be
the delays caused by land acquisition and environmental clearances. This reason
for NPAs was adequately documented in the Economic Survey. The fourth reason is
the Asset Quality Review mandated by the Reserve Bank of India (RBI) in 2015.
This was much needed, since it put a stop to the “extend and pretend” culture
around worsening credit.
To be fair, the RBI showed great regulatory forbearance in
allowing lenders to work out remedies for genuine cases which faced a business
cycle downturn. Various options were made available, including extending
duration of loans, debt restructuring, swapping equity for debt and so on. But
it does not seem to have made any significant difference. The NPA recovery
process has since got a boost due to the new insolvency and bankruptcy law. The
government too announced the Indradhanush scheme focused on banking reforms
and recapitalisation of NPA-burdened banks. Two instalments of infusion in the
past two years proved woefully inadequate as the NPA ratio continued to mount.
The fifth reason for worsening NPA is an omnibus called
“malfeasance”. This includes cosy relationships between banker and borrower,
crony capitalism, political interference in lending decisions (a legacy of the
past), a less than vigorous attempt to recover past dues, careless due
diligence, etc.
There may be other reasons as well. The fact is that 10% of
all loans have gone bad. No wonder that after provisioning, for many
public-sector banks their net worth would be completely eroded. Hence the days
of piecemeal and feeble remedies are gone.
More reforms needed
In the light of this background, the decision to inject ₹2.11 lakh crore of capital into public sector banks is a welcome
boost. This was also evident from the reaction of the stock market as some bank
stocks soared by as much as 35%. It is somewhat a moot point that this
injection could have been done at least one year ago.
The injection is clever because it has been done without
busting the promised fiscal deficit target. It has been financed by the sale of
recapitalisation bonds. Banks are currently flush with cash which was deposited
after demonetisation. Much of that same cash will be used to buy those bonds.
The proceeds of the sale of these bonds will be put back into the bank as fresh
equity by the government. It’s a neat roundtrip of depositors’ cash coming back
as capital. To that extent it is taxpayers who are funding this equity
injection. More details are awaited. For instance, since banks are listed
entities, should not other shareholders apart from the government also be asked
to make a matching equity infusion? What about the windfall gains that arose as
a result of this equity infusion? How will the bonds be repaid by the
government? What will be their duration? Will they be traded? Would they instead
be converted into perpetual bonds, never to be repaid, as was done to the
1992-93 bonds?
Suffice to say that this capital infusion provides banks
with the much-needed room to make fresh loans. In the coming days of Basel-3
where much capital is needed for risk provisioning, the NPAs are a millstone
which prevent fresh lending.
With this big bang recap effort, we can expect the growth
pipes to be unclogged. Of course, the recapitalisation effort is useless
without accompanying reforms which can prevent a recurrence. Those reforms are
mostly about governance, meaning granting genuine autonomy to banks in their
functioning, including all aspects such as lending, recovery, and recruitment
decisions. Banks have to be accountable to shareholders, including the
government, through their respective boards. That’s the fourth crucial “R” that
was part of this recap package – recognition, recapitalisation, resolution and
reform. Without reform of credit functioning, culture, treatment of
delinquencies and even ownership structure in banking, this recap effort will
only be stopgap. Assuming reform is coming (witness the huge increase in
India’s global rank in ease of doing business), let’s raise a toast to the bank
recap.
Ajit Ranade is an economist
XXX
A
bold step in bank reform (27.10.17)
With India’s economic growth faltering in the last couple of
years, the government has been casting about for ways to galvanise the economy.
Last November, it
tried demonetisation. It was a bold move but its economic benefits will be
long in coming while the short-term disruption has been very real and
demoralising. This year, it pushed through the goods and services tax (GST).
Again, this is hugely positive over the medium term, but is painful in the
short run.
Cheering the markets
The government seems to have realised that a simpler, more
effective remedy is at hand: recapitalising public sector banks (PSBs) and
enhancing the flow of credit. The proposal to recapitalise
PSBs to the extent of ₹2.11 trillion (₹2.11 lakh crore) is a winner by any reckoning. It is, perhaps, the
most effective way to provide a much-needed fiscal stimulus to the economy and
revive growth. Small wonder that the markets have given the move a rapturous
welcome.
To understand the significance of bank recapitalisation, we
need a little primer on bank capital. Regulation requires that banks hold
assets only in proportion to the capital they have. ‘Capital’ is a combination
of equity, equity-like instruments and bonds. For a given balance sheet, there
is a certain minimum of capital that banks must hold. This is called ‘capital
adequacy’. The higher the capital is above the regulatory minimum, the greater
the freedom banks have to make loans. The closer bank capital is to the
minimum, the less inclined banks are to lend. If capital falls below the
regulatory minimum, banks cannot lend or face restrictions on lending.
When loans go bad and turn into non-performing assets
(NPAs), banks have to make provisions for potential losses. This tends to erode
bank capital and put the brakes on loan growth. That is precisely the situation
PSBs have been facing since 2012-13.
‘Stressed advances’ (which represent non-performing loans as
well as restructured loans) have risen from a little over 10% in 2012-13 to 15%
in 2016-17. This has caused capital adequacy at PSBs to fall. Average capital
at PSBs has fallen from over 13% in 2011-12 to 12.2% in 2016-17. The minimum
capital required is 10.5%. An estimated 10 out of 20 PSBs have capital of just
one percentage point above the minimum or less. Inadequate capital at PSBs has
taken its toll on the flow of credit. Growth in credit has fallen below double
digits over the last three years. Between 2009-10 and 2014-15, annual credit
growth was in the range of 15-20%. In the ‘India Shining’ period of 2004-09,
credit growth had been over 20%.
Some observers ascribe the deceleration in credit growth to
poor demand. They say that corporates have excessive debt and are in no
position to finance any investment. This may be true of large corporates.
However, it is not true of enterprises in general. One study, which covered
over 4,000 companies, showed that the debt to equity ratio fell below 0.8
(which is a low level of debt) in 2008-09 and remained low until 2012-13. (J. Dennis
Rajakumar, ‘Are corporates overleveraged?’, Economic and Political
Weekly, October 31, 2015).
Moreover, demand for investment finance may have decelerated
but demand for working capital remains strong. If anything, the introduction of
GST has increased small business demand for working capital. Low growth in
credit is confined to PSBs. Private banks have seen loan growth of 15% this
year.
Evident since 2014
The government has realised that there is a problem with the
supply of credit. It has to do with PSBs’ inability to lend for want of
adequate capital. The National Democratic Alliance (NDA) government should have
recognised the problem when it assumed office in May 2014. At the time,
stressed advances were already 10% of the total. The NDA government should have
moved swiftly to recapitalise PSBs.
Instead, it chose to sweep the problem under the carpet.
Market estimates had placed the requirement of government capital at a minimum
of ₹2 lakh crore over a four-year period. In 2015,
under the Indradhanush Plan, the government chose to commit a mere ₹70,000
crore over the period.
The dominant view in government at the time seemed to be
that PSBs had messed up in a big way, so putting more capital into them was
simply ‘money down the drain’. Their role needed to be shrunk through
consolidation or by selling strategic stakes to private investors.
This is a mistaken view. The bad loan problem at PSBs is not
entirely the result of mismanagement. There have certainly been cases of
malfeasance and poor appraisal of credit. However, as the Economic Survey of
2016-17 made clear, these are not responsible for the bulk of the NPA problem.
The problem is overwhelmingly the result of factors extraneous to management.
PSBs, unlike their private sector counterparts, had lent
heavily to infrastructure and other related sectors of the economy. Following
the global financial crisis of 2007, sectors to which PSBs were exposed came to
be impacted in ways that could not have been entirely foreseen. Blaming PSBs
for the outcomes and starving them of capital was not the answer.
The failure to quickly recapitalise PSBs has adversely
impacted the economy in many ways. First, it has come in the way of adequate
supply of credit. Second, it has hindered the effective resolution of the NPA
problem and kept major projects from going through to completion. Resolution
requires banks to write-off a portion of their loans in order to render
projects viable. They cannot do so if they see that write-offs will cause their
capital to fall below the regulatory minimum. Third, corporates are stuck with
high levels of debt and are unable to make fresh investments.
The government’s move to recapitalise banks changes the
picture. Of the ₹2.11 trillion package, ₹1.35 trillion
will be towards issue of recapitalisation bonds. PSBs will subscribe to these
bonds. The government will plough back the funds into banks as equity. Another
₹180 billion will be provided as budgetary support. The remaining ₹580 billion will be raised from the market. Analysts believe the
package should enable banks to provide adequately for NPAs and support modest
loan growth. Once PSBs have enough capital and are in a mood to lend, they can
liquidate excess holding of government securities and use the cash to
make more loans.
Analysts worry about the fiscal impact of the
recapitalisation package. International norms allow borrowings for bank
recapitalisation not to be counted towards the fiscal deficit. In the past,
India has used this accounting fudge. The proposed recapitalisation bonds are
likely to add to the fiscal deficit unless the government resorts to other
fudges such as getting the Life Insurance Corporation of India or a separate
holding company to issue the bonds. The government should not worry unduly
about missing
the fiscal deficit target of 3.2% of GDP. The markets will understand that
the fiscal stimulus is well spent.
Getting the record straight
Analysts also fret over repeated bailouts of PSBs and the
costs to the exchequer. They seem to think that bank bailouts have to do with
government ownership and inefficiency and the answer is to privatise some of
our PSBs. They couldn’t be more wrong.
The overwhelming majority of bank systems worldwide are
privately owned. And yet these systems are prone to periodic bouts of bank
failures. The International Monetary Fund has documented 140 episodes of banking crises
in 115 economies in the world in the period 1970-2011. The median cost of bank
recapitalisation in these crises was 6.8% of GDP. India’s cost of
recapitalisation over a 20-year period is less than 1% of the average GDP
during this period.
The Modi government has shown courage in opting for
substantial recapitalisation of banks. This is not something that fits into the
‘reform’ mantra whereby private is good and public is bad. Reserve Bank of
India Governor Urjit Patel has welcomed the move in effusive terms: “The
Government of India’s decisive package to restore the health of the Indian
banking system is in the view of the [RBI] a monumental step forward in
safeguarding the country’s economic future.” Indeed. The government’s
recapitalisation move promises to do more to quickly usher in ‘acche din’ than
any other single measure it has initiated during its tenure.
T.T. Ram Mohan is a professor at IIM Ahmedabad. E-mail:
ttr@iima.ac.in
XXX
Pursuit of growth: PSB recapitalization (26.10.17)
The Centre’s decision to infuse ₹2.11 lakh crore of fresh capital into public sector banks over
the next two years, through a blend of financial mechanisms, should help revive
the growth momentum. Saddled with bad loans as well as stressed assets of close
to ₹10 lakh crore, India’s banking sector has been
naturally wary in recent quarters of extending fresh loans, as reflected in
bank credit growth slipping to a 60-year low of just 5% this April. Since its
first year in office, the government has been seized of what Chief
Economic Adviser Arvind Subramanian calls the twin
balance-sheet problem. If over-leveraged companies are unable to invest or
borrow afresh, and banks are unwilling or/and unable to finance fresh
investments, a private investment-led recovery is unlikely. However, it was
only late last year that a new bankruptcy law was introduced, and over the
course of this year the Reserve Bank of India has asked banks to invoke
insolvency proceedings in the case of 50-odd accounts if settlements remain
elusive. Banks, under pressure from the RBI to acknowledge the stress on their
books, face the prospect of taking heavy haircuts to write off some of these
loans at whatever residual value remains in the businesses. When combined with
their need to scale up their capital base to comply with Basel III norms,
public sector banks have naturally been in damage control mode rather than
chasing growth like their private sector peers.
The three-part package for lenders includes ₹18,000 crore from the Budget, ₹58,000 crore that banks can raise from
the market (possibly by tapping the significant room available to dilute the government’s
equity that remains well over 51%) and the issue of recapitalisation bonds
worth ₹1.35 lakh crore. Though there are still many
unknowns about the nature of these bond issues (whether they will affect fiscal
deficit calculations or be off-balance-sheet sovereign liabilities, for
instance), the overall plan gives banks a better sense about their immediate
future. The bonds will front-load capital infusion while staggering the fiscal
impact, which Mr. Subramanian expects to be limited to the annual interest
costs on these bonds of about ₹9,000 crore. The
Centre is betting this will strengthen the banks’ ability to extend credit at a
faster clip. RBI Governor Urjit Patel has said this is the first time in a
decade that there is a real chance of meeting the banking sector’s
challenges. But it is still a long haul. While more details on this package are
awaited, including how banks will be picked for funding and the possible interplay
with proposed mergers of banks, equally critical will be the reforms that
Finance Minister Arun Jaitley has promised as a necessary adjunct. Banks are
where they are, not just because of capital constraints but also because of
their inefficiencies and past lending overdrives.
(All of the above articles have been taken straight from The
Hindu. We owe it all to them. This is just an effort to consolidate opinions
expressed in The Hindu in a subject-wise manner.)
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