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Wednesday, May 27, 2020

Seeds of a crisis

If recapitalisation is not linked to reform, imprudent lending could lay the ground for the next banking calamity.

By: Editorial | Updated: December 24, 2018 12:12:39 am
psb recapitalisation, public sector banks, public sector banks india, bank debts in india, rbi, rbi prompt corrective action,  Insolvency and Bankruptcy Code, narendra modi, lok sabha elections 2019 By not linking recapitalisation to reform — which can happen only with the government’s stake falling to below 50 per cent and transferring even this to a separate holding company that would secure the former’s financial interests — the danger is of the seeds of the next crisis being sown through imprudent lending.

The Narendra Modi government has announced an additional fund infusion of Rs 41,000 crore towards recapitalisation of public sector banks (PSB), taking the total for the current financial year alone to Rs 1.06 lakh crore. Adding the outlays since 2015-16 — when the exercise to enable PSBs to clean up their balance sheets by fully providing for and absorbing losses on bad loans began — the estimated aggregate capital infusion would come to over Rs 3 lakh crore. Much of this is public money: Recapitalisation may not technically lead to a higher fiscal deficit at least in the short term, as the funds given to the PSBs are to be mainly reinvested in government bonds. But since the interest on these bonds will have to be borne by the Centre, it effectively amounts to using taxpayers’ money.

The question, then, needs to be asked: Is this exercise worth it? The government’s claim is that recapitalisation will allow PSBs — especially those with large non-performing assets and facing lending restrictions under the Reserve Bank of India’s (RBI) so-called prompt corrective action — to resume normal banking operations, boosting credit growth necessary for overall economic revival. However, if that was so, what stopped the government from undertaking such recapitalisation in the early part of its tenure? Both recapitalisation and resolutions of corporate loan defaults under the Insolvency and Bankruptcy Code really took off only from 2017-18. Had they been initiated a couple of years earlier — the November 2016 demonetisation decision probably made matters worse, by taking the focus of policymakers and banks away from the bad loans problem — the cost to the exchequer and the economy would have been far less. Politically, too, the Modi government would have entered election season with banks that were well-capitalised and in a position to fund a full-fledged investment-cum-growth recovery. Timely action would also have obviated the need for asking the RBI to part with its “excess” reserves or cough up extra dividend to finance recapitalisation.

Equally important is a related question: Should not recapitalisation be conditional upon the improvement of governance standards in PSBs? The roots of the bad loan crisis, we know, lay in these banks not being allowed to function as autonomous and board-managed entities. By not linking recapitalisation to reform — which can happen only with the government’s stake falling to below 50 per cent and transferring even this to a separate holding company that would secure the former’s financial interests — the danger is of the seeds of the next crisis being sown through imprudent lending. We are already beginning to see signs of that in the form of farm loan waivers. If the purpose of recapitalisation is to fund losses from such purely politically motivated decisions, the taxpayer has every reason to feel aggrieved and shortchanged.

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