The failure of the government to let go or to lower its holdings in banks is extracting a huge cost, as the repeated infusion of capital in these banks shows. On Tuesday, the Cabinet approved a capital infusion of Rs 9,300 crore in IDBI Bank, as a one-time exercise, with LIC to pump in Rs 4,743 crore while the government will provide Rs 4,557 crore in proportion to its shareholding of 49 per cent. This, it says, will help address the issue of legacy bad loans of a bank which reported a net loss of Rs 3,801 crore in the quarter to June 2019, with a gross Non Performing Assets or NPA ratio of 29.12 per cent in the same period as a percentage of its total advances or loans.
Clearly, the cleaning up of the books of a bank in which the government is not a majority shareholder is turning out to be costly considering that part of IDBI Bank’s legacy bad loans of over Rs 9,000 crore were transferred to a Stressed Assets Fund well over a decade ago. It also illustrates the political failure to move on privatising the bank which was identified as a potential first candidate by the government which later backpedalled, reckoning that public opinion was yet to evolve on this sensitive issue. The former Chief Economic Advisor, Arvind Subramanian, who left the government last year, too, had pitched for privatisation of some PSU banks, indicating that without major changes, the problems are likely to linger and recur. Former RBI Governor Duvvuri Subbarao, in an article that appeared in these columns on Thursday, flagged the issue of whether the government should own banks at all. He has suggested that it would be better off unveiling a roadmap for shedding majority stake in these banks.
The other serious concern is that of LIC’s use of policyholders’ funds for investments in weak banks such as IDBI Bank and the bet on its investments paying off later. That seems to be a long haul in this case. Clearly, the fiscal costs of retaining control in many banks and other state-owned firms is high when there are competing demands for funds in sectors such as health, education and infrastructure and with pressure on meeting the annual fiscal deficit target. From a political economy perspective, it would make sense for the government to retain ownership control in the country’s largest bank, SBI, which has a share of nearly one-third of the banking business and perhaps a couple of other large PSU banks, while divesting the rest once there is an economic upturn.