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Recapitalisation and it’s Bond with India

In the words of our ex-finance minister Mr. Arun Jaitley, “The entire objective is that the government has the prime responsibility of keeping the public sector banks in good health”. The above is in context of recapitalisation of public sector banking institutions. These public sector banks (PSBs), have their own sets of problems with primarily the non-performing assets (NPAs) impeding credit outflows. That is the prime reason why the central government has been Recapitalising the PSBs since 2014-15 (FY15) and continues to do so but there are little signs of improvement. Before further exploring this, it is vital to look at some things.

What is Recapitalisation? Recapitalisation refers to the injection of capital to Public sector banks(PSB’s) to improve the financial strength or enhance the financial position of the banks. Since the government is the majority shareholder of PSB’s, the responsibility of adding capital through equity investment lies in the hands of the governments. As news surrounds us the Government of India has proposed to infuse 40000 crores in the Public Sector Banks towards recapitalisation in 2020.

What is the need for Recapitalisation? Capital is core to banks for expanding credit, earning interest and growing balance sheets so that they can drive economic activities. Recapitalisation is necessary for PSB’s as they are facing various financial problems. Firstly, due to an increase in the volume of bad assets or bad loans the capital is dissolving. So the banks require money in the context of these bad debts. Secondly, banks are required to maintain the capital requirements as per the Basel III norms. So they require funds to maintain higher capital. Thirdly, expanding credit needs in the economy also require higher funds by the banks in order to extend more loans.

NPA’s- the cause of worry: The commercial banks have to incur losses on account of finances with very low recovery or no recovery. Sometimes even the principal amount is not recovered which gives rise to a consistent increase in non-performing assets(NPA’s). Banks do not earn any interest on their non-performing assets. NPAs are bad debts and get written off eventually. This has been bleeding PSBs, leading to losses at many banks and eroding their capital base. The big and influential business magnets including the likes of Vijay Mallya of Kingfisher have swallowed thousands of crores of the banking system and ran away. All these factors make already the fund starved banking industry cry for more capital. The banks need to provide for such NPA’s or set aside money, which could have earned interest on if extended as loans. Governments compensate for this loss by infusing public money to improve liquidity, and thereby credit flow to various sectors of the economy. Therefore the objective of recapitalisation as explained by the government is “to pursue timely resolution of NPAs”.

Current scenario: The finance minister Nirmala Sitharaman declared an upfront capital infusion of Rs 70,000 crore. The PSBs have now been recapitalised to the extent of Rs 3.82 lakh crore. Between FY15 and FY19, the government had infused Rs 2.46 lakh crore and the PSBs had mobilised another Rs 0.66 lakh crore on their own. The Gross NPAs of the PSBs stood at Rs 8.06 lakh crore as on March 31, 2019, and the Net NPAs at Rs 4.54 lakh crore on March 31, 2018. That was after Rs 3.21 lakh crore had been written off and Rs 3.12 lakh crore of capital was infused into these banks between FY15 and FY18.

The Finance Minister even announced the merger of 27 public sector banks into 12, the biggest being the merger of Punjab National Bank, Oriental Bank of Commerce and United Bank. The three banks together will merge to form India’s second-largest bank after the State Bank of India, with Rs 17.95 lakh crore business and 11,437 branches. She also claimed that the gross NPA level has come down heavily and that the center is monitoring large loans to avert frauds. She also claimed that the sanctioning and monitoring of loans have been separated, and special agencies have been formed to monitor loans above Rs 250 crore to avoid Nirav Modi-like situation in the future. Apart from this the Reserve Bank of India have come up with the Prompt Corrective Action (PCA) framework to control the bad situations at Banks.

A lot is proposed and done but definitely a lot needs to be done. Some steps to be taken are, to correct the rot in the banking sector. With bank frauds such as that of Punjab National Bank, bringing governance practices in Public Sector Banks (PSBs) to public debate, a permanent solution needs to be found out. There are questions raised on the way these entities function. A political blame game is on but the problems in this sector are far beyond one instance of fraud. After five decades of bank nationalisation, India’s public sector banks face deeper structural problems ranging from poor management practices, ineffective risk-management systems, vulnerability to a political-corporate nexus, a large chunk of bad loans and lack of sufficient autonomy. The Government should follow it up with structural reforms to reduce its role in the public sector banks and move towards privatisation. This will bring in efficiency and accountability and ultimately to better NPA management.

Conclusion: Despite using the taxpayer’s money to get these public sector banks out of their financial crisis earlier as well, that is the recapitalisation of Rs.2.11 lakh crores to PSBs in 2017,the efforts have failed miserably. The gross NPA ratio of scheduled commercials banks rose from 10.2 percent to 11.6 percent according to the recent reports. Private banks fared much better during the period under review with an NPA ratio of only 4 percent whereas PSBs gross NPA ratio at the end of the period was 15.6 percent. This clearly shows that there seems no such end of recapitalisation. Having increased the funding for recapitalisation of public sector banks by the government, to 3.19 lakh crore in the FY 15 to FY 19 they are still found wanting more. Thus, the only way to solve this is effective government reforms.

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1 Comment

  1. Parminder Singh

    Well written ” Soumya Nijhawan”

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