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Sunday, October 17, 2021

Sword of recapitalisation

Bailing out public-sector banks from the NPA crisis will either increase the fiscal deficit or lead to cuts in welfare and capital expenditures.

Written by C P Chandrasekhar |
Updated: February 24, 2016 12:01:44 am
banking, npa banking, psb banks, rbi npa, union budget, union budget 2016, budget 2016, budget banking, rbi budget, india news, business news Illustration by C R Sasikumar

India’s public-sector banks (PSBs) are sitting on more than Rs 7 lakh crore of stressed assets, defined as the total of non-performing assets (NPAs) and restructured assets, according to reports in this newspaper based on Reserve Bank of India data. Moreover, if recent trends are an indication, this stock of stressed debt is likely to lead to defaults that would force provisioning and subsequent debt write-off or transfer at a huge discount, which would damage bank profitability and erode bank net worth.

This is obviously bad news for the banks. But it is also disturbing news for a government that cannot allow the situation to deteriorate further, given its economy-wide ramifications. Bank balance sheets need to be cleaned up by ridding them of NPAs and PSBs need to be recapitalised by shoring up equity capital. That requires infusion of money into the banking system by the state. Unfortunately, the government is committed to further reducing its fiscal deficit, or the excess of total expenditures over revenues and receipts plus non-debt capital receipts (such as from the sale of public assets). It expects to keep that deficit at a targeted 3.9 per cent of the GDP in 2015-16 and reduce it further in Budget 2016-17.

This makes the task difficult to achieve. Even without the recapitalisation imperative, ensuring further fiscal consolidation next year would be particularly challenging for a number of reasons. To start with, the government is committed to implementing the Seventh Pay Commission’s recommendations, which would significantly increase revenue expenditures. Second, it has already promised the corporate sector that it would begin the process of bringing down the corporate tax rate. Even though this is to be accompanied by the withdrawal of some tax exemptions and concessions, revenues from this source are likely to take a hit. Third, there is strong evidence to suggest that expectations of raising large resources through disinvestment, of public equity and privatisation of public-sector enterprises, are clearly misplaced. Thus, while the government had budgeted for receipts of Rs 65,000 crore from this source in 2015-16, the actual receipts are, as of now, well below Rs 15,000 crore, and are not likely to go far beyond Rs 20,000 crore by the time the new budget is presented. The market is just not right for offloading equity, and the private sector is unwilling to respond to strategic sales initiatives even at reduced prices.

This leaves little fiscal headroom for large-scale recapitalisation. The government has been resorting to limited recapitalisation in the past to help PSBs clean up their balance sheets and make them Basel III compliant over time. However, outlays for the purpose were kept low by letting banks postpone declaring defaulting assets as non-performing. This was done by permitting them to restructure large loans that were in essence non-performing by some combination of an extension of the maturity of the loan, reduction of interest rates, conversion of debt into equity and provision of an additional dose of debt in the hope that the performance of the concerned companies would improve. Such restructuring permitted bad debt to be recorded as standard, restructured assets and kept out of provisioning requirements.

As a result, the pressure on the government to opt for recapitalisation was not difficult to bear, though it was rising over time. Between 2000-01 and 2014-15 budgetary expenditure on recapitalisation of banks totalled Rs 81,200 crore. Much of this expenditure occurred towards the end of this period. As much as Rs 58,600 crore (or around 72 per cent of the total expenditure) was used during just four consecutive years ending 2013-14.

Surprisingly, after 2013-14, the budgetary allocations for recapitalisation seem to have fallen. In 2014-15, while Rs 11,200 crore was allocated for the purpose in the budget, actual capital infusion into PSBs was just

Rs 6,900 crore. Budget 2015-16 had reduced even the budgeted allocation to Rs 7,940 crore. This was not because provisioning requirements had fallen. The gross NPAs of PSBs have increased from 2 per cent of advances at the end of March 2009 to 6 per cent at the end of June 2015. Between 2004 and 2015, banks had to write-off Rs 2.11 lakh crore, of which as much as Rs 1.14 lakh crore occurred between 2013 and 2015. And the problem is not over yet. With NPAs at the end of September 2015, totalling Rs 1.74 lakh crore, being a third of net worth, future write-offs are likely to fatally damage some banks unless the government steps in with support.

There is one factor that may explain the fall in recapitalisation allocations over the last two financial years: The government was seriously considering getting PSBs to sell additional equity in the market to raise capital and ensure adequacy. It was, however, unable to push ahead with this agenda, which might have privatised the nationalised banking system.

Meanwhile, the NPA accretion accelerated, necessitating provisioning and hurting the profit record of the banks concerned. Realising that the matter cannot be ignored further, the RBI tightened the norms for classification of assets as non-performing, enhanced scrutiny of the quality of assets and required that restructured assets be reported and treated as part of stressed assets. This has brought into the open the magnitude of the problem, which will make it difficult for the government to delay large-scale recapitalisation any further.

If the finance minister must provide for recapitalisation in the forthcoming budget and yet stick by his declared commitment to fiscal deficit reduction, he would have to do so by curtailing subsidies and welfare expenditure, and by slashing capital expenditure. But given the state elections around the corner, he may alternatively choose to massage the numbers to yield large tax revenues or inflated receipts from privatisation. Or he can keep recapitalisation allocations low in the budget but provide for them later by cutting expenditures elsewhere. Only the budget will show which way he will go.


The writer is professor at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, Delhi.

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