The Centre on Tuesday announced a mega recapitalisation plan for Public Sector Banks (PSBs) and touted it as a win-win for all. This will infuse a mammoth `2.11 trillion in these banks over two years, of which, `1.35 trillion will be through the so-called recapitalisation bonds.PSBs in India have faced a slow-motion crisis for long. Their bad debt ratio is almost twice that of their private counterparts. The latest development is supposed to bail them out of bad debts worth `10 lakh crore or even `13-14 trillion, according to recent figures. The package is only a fraction of what independent analysts estimate is necessary to restore the state-owned banks to health. Moreover, it does not take into account the reserve requirements of nearly 3.6 crore as Basel III kicks in March 2019. Also, the present plan is spread over five years, with uncertain budget allocations and dependency on bonds, for which they have to pay every year.
At the best this may ensure that the investment pipeline in India works again. Bailing PSBs has left the NDA with a devil-or-deep-sea choice. While the recap bond idea offers an expedient solution to PSB capital woes, there can be negative repercussions in the long run, which the Centre must recognise.
The capital infusion the Centre is now willing to fork out, militates against the spirit of the original Indradhanush scheme that had tied PSB infusions to performance metrics.
The reason these banks need bailouts so often is because they are constantly subjected to political pressure. At times, their ‘extend and pretend’ behaviour is driven by the demands of what we are now supposed to euphemistically call ‘Politically Exposed Persons’. At other times, the banks are compelled to ignore their primary purpose—providing savers with returns, and supporting worthwhile projects—because of government policy. In the past few years, for example, they have been forced by the Union government onto the front lines of other policy battles, such as farmers’ suicides. This big-ticket bailout will actually raise the Centre’s equity holdings in the PSBs, making them even more vulnerable to undue interference.
The assumption that recapitalisation will make PSBs stronger and more sustainable is faulty. This is not the first time they have been bailed out and all the previous attempts have failed. For public sector lenders to truly be back in the business of lending, it would take more than the infusion.
Banks’ indulgence in crony capitalism and government’s politically-motivated diktats are the principal cause of increasing bad debts called non-performing assets (NPAs). According to the RBI’s statistical tables relating to banks in India (2015-2016), NPAs were 3 per cent of the gross advances of all banks in India in 2013. By 2016, they had grown to 9.3 per cent. The increase was much more pronounced for nationalised banks—from 2.9 per cent in 2013 to 13.8 per cent in 2016—compared to privately-owned banks, where the NPAs rose from 2 per cent of gross advances in 2013 to 3.1 per cent in 2016.
The system does not have enough capital to take care of its bad loans. Unless the PSBs are allowed to either run independently (government diktat), are privatised, or are encouraged to slowly shrink into nothingness as private competitors expand, this recapitalisation is meaningless.Unfortunately, the governance reforms at PSBs, particularly those related to the distancing of its boards from government interference, have made snail-paced progress in the last three years. The fact that recapitalisation bonds can be used for capital infusion is not an alternative for better governance. The best way to alleviate these concerns is to step up reforms even as the government works out the modalities of this bailout plan. A system that needs constant bailouts must be abandoned.
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