<p>The Rs 2.11 lakh crore recapitalisation plan announced for public sector banks (PSBs) is a ‘monumental step’ not because we may get great results from the ‘veterinary dose’ of recapitalisation, but because of the fait accompli that the Narendra Modi government finds itself presented with, as all the stakeholders in the banking system — PSBs, the Centre, the RBI, the rating agencies, statutory auditors, unscrupulous and dishonest corporates/borrowers — are responsible for the bad loans mess. That is precisely why they are all cheering Finance Minister Arun Jaitley’s announcement and the Sensex/Bank Nifty have risen to all-time highs.<br /><br />The recapitalisation decision, the Rs 6.92 lakh crore investment plan under the 83,677-km Bharatmala road-building project, Union Revenue Secretary Hasmukh Adhia’s admission that the rate structure of the ‘stillborn’ Goods and Services Tax (GST) requires “complete overhaul,” the increase in the minimum support prices (MSP) of wheat, pulses and oilseeds, and Modi reviving the Prime Minister’s Economic Advisory Council are all reflective of the desperation, even panic, and urgency to shore up the sagging economy. Together, they appear to be the ‘economic manifesto’ as we head into elections in Gujarat, Himachal Pradesh and Karnataka and finally the 2019 Lok Sabha elections.<br /><br />The recapitalisation amount of Rs 2.11 lakh crore is to be garnered through three measures — Rs 1.35 lakh crore by way of bonds, Rs 18,000 crore by way of budgetary allocations and Rs 58,000 crore by dilution of the government’s stake in <br />PSBs to around 52%. <br /><br />The recapitalisation exercise has become necessary because the banks’ monstrous non-performing assets (NPA) have choked economic growth despite favourable macroeconomic factors such as low/benign inflation, relatively good monsoons, favourable international crude oil prices and substantial forex reserves of over $400 billion.<br /><br />The banks are sitting on a humongous pile of NPA — to the tune of Rs 12 lakh crore. If we factor in the “time bomb” 60–90 days clause for reckoning further loans as NPA, that would add another Rs 8 lakh crore in toxic assets.<br /><br />Theoretically, the recapitalisation of PSBs should help the banks to clean up their balance sheets, provide capital for the ‘additional provisioning’ required for NPA, as per RBI and National Company Law Tribunal (NCLT) norms, write off unrecoverable cases, equip for capital adequacy for Basel III requirements, which become effective in 2019, and start lending for growth sectors.<br /><br />The de-stressing of all the toxic assets with the PSBs should help them to start lending again to the core sectors — infrastructure, roads and highways, steel, cement, coal, power, real estate and affordable housing — to galvanise the economy. The banks’ credit offtake is at a historic low at 7%, with the GDP nosediving to 5.7%.<br /><br />The plan envisages that fresh lending to the core sectors, with a special focus on Micro, Small and Medium Enterprises (MSME ) through sector-specific MUDRA financing, will kickstart job creation, which has been stagnant, and the private investment cycle through the multiplier effect and virtuous cycle of employment, income, savings and investment.<br /><br />The bank bailout plan, once it materialises, will be a quick fix or band-aid solution but can have huge repercussions and cause damage — direct and collateral — in the long run.<br /><br />Issues of concerns<br /><br />1. The Centre is yet to come out with the concrete recapitalisation bond model/sale mechanism. Repercussions will be known only when the ‘bond scheme’ is announced as there are critical issues involved that can adversely affect and disrupt the economy.<br /><br />2. The design and architecture of the bond itself will be a challenge. Who should issue the bonds – the government or a special purpose vehicle (SPV) or a holding company? Who will subscribe to the bonds and at what coupon rate, will be the crux of the issue?<br /><br />3. If the government issues the bonds, say at 8-10%, and PSBs subscribe to them using the excess liquidity they are holding as a result of demonetisation, the government will have to service the interest component, which could be as high as Rs 8,000-10,000 crore, leading to fiscal slippage. The fiscal deficit target of 3.2% of the GDP will be breached. Worrisome, as the deficit had already surpassed 96% of the budget of Rs 5.25 lakh crore by the end of August itself!<br /><br />4. Post-NPA clean-up of the PSBs, what is the guarantee that the banks will be prudent in lending to the core sectors and corporates? Bankers have become diffident about lending to the growth-engine sectors, who are the major defaulters, as they are scared of punitive actions, forensic audits and subjugation to enquiries by the 4Cs -- CBI, CVC, CAG and the Courts. If all goes well, however, private investment and the capex will be revived, but only after September/December 2018.<br /><br />5. Banks recapitalisation will solve one side of the ‘twin balance sheet’ issue. Corporate balance sheets are still ‘bleeding’ and are trapped in the vicious cycle of bad debts, low demand, meagre earnings and high interest rates on borrowings. The gloom has been further aggravated by the disruption, confusion and dents inflicted by demonetisation, GST and RERA.<br /><br />6. The bailout in the form of recapitalisation of banks and loan waivers to defaulters will send a very wrong signal to prudent bankers (private/public) and good clients, as bad banks are salvaged and unscrupulous bankers go scot-free. This is a serious moral hazard and will have a negative demonstration effect.<br /><br />7. Radical steps should be taken through administrative and banking reforms to privatise weak PSBs while they still have “some intrinsic value” — merge big <br />banks that have synergies for economies of scale, dilute government stakes in PSBs to less than 48% so that bankers can function honestly, independently and professionally, and couple all these with a total overhaul in the salary structure, award and reward mechanism, in sync with the best private banks and global standards.<br /><br />Otherwise, recapitalising banks will not yield results. Rather it will be like pumping oxygen into a dead body.</p>
<p>The Rs 2.11 lakh crore recapitalisation plan announced for public sector banks (PSBs) is a ‘monumental step’ not because we may get great results from the ‘veterinary dose’ of recapitalisation, but because of the fait accompli that the Narendra Modi government finds itself presented with, as all the stakeholders in the banking system — PSBs, the Centre, the RBI, the rating agencies, statutory auditors, unscrupulous and dishonest corporates/borrowers — are responsible for the bad loans mess. That is precisely why they are all cheering Finance Minister Arun Jaitley’s announcement and the Sensex/Bank Nifty have risen to all-time highs.<br /><br />The recapitalisation decision, the Rs 6.92 lakh crore investment plan under the 83,677-km Bharatmala road-building project, Union Revenue Secretary Hasmukh Adhia’s admission that the rate structure of the ‘stillborn’ Goods and Services Tax (GST) requires “complete overhaul,” the increase in the minimum support prices (MSP) of wheat, pulses and oilseeds, and Modi reviving the Prime Minister’s Economic Advisory Council are all reflective of the desperation, even panic, and urgency to shore up the sagging economy. Together, they appear to be the ‘economic manifesto’ as we head into elections in Gujarat, Himachal Pradesh and Karnataka and finally the 2019 Lok Sabha elections.<br /><br />The recapitalisation amount of Rs 2.11 lakh crore is to be garnered through three measures — Rs 1.35 lakh crore by way of bonds, Rs 18,000 crore by way of budgetary allocations and Rs 58,000 crore by dilution of the government’s stake in <br />PSBs to around 52%. <br /><br />The recapitalisation exercise has become necessary because the banks’ monstrous non-performing assets (NPA) have choked economic growth despite favourable macroeconomic factors such as low/benign inflation, relatively good monsoons, favourable international crude oil prices and substantial forex reserves of over $400 billion.<br /><br />The banks are sitting on a humongous pile of NPA — to the tune of Rs 12 lakh crore. If we factor in the “time bomb” 60–90 days clause for reckoning further loans as NPA, that would add another Rs 8 lakh crore in toxic assets.<br /><br />Theoretically, the recapitalisation of PSBs should help the banks to clean up their balance sheets, provide capital for the ‘additional provisioning’ required for NPA, as per RBI and National Company Law Tribunal (NCLT) norms, write off unrecoverable cases, equip for capital adequacy for Basel III requirements, which become effective in 2019, and start lending for growth sectors.<br /><br />The de-stressing of all the toxic assets with the PSBs should help them to start lending again to the core sectors — infrastructure, roads and highways, steel, cement, coal, power, real estate and affordable housing — to galvanise the economy. The banks’ credit offtake is at a historic low at 7%, with the GDP nosediving to 5.7%.<br /><br />The plan envisages that fresh lending to the core sectors, with a special focus on Micro, Small and Medium Enterprises (MSME ) through sector-specific MUDRA financing, will kickstart job creation, which has been stagnant, and the private investment cycle through the multiplier effect and virtuous cycle of employment, income, savings and investment.<br /><br />The bank bailout plan, once it materialises, will be a quick fix or band-aid solution but can have huge repercussions and cause damage — direct and collateral — in the long run.<br /><br />Issues of concerns<br /><br />1. The Centre is yet to come out with the concrete recapitalisation bond model/sale mechanism. Repercussions will be known only when the ‘bond scheme’ is announced as there are critical issues involved that can adversely affect and disrupt the economy.<br /><br />2. The design and architecture of the bond itself will be a challenge. Who should issue the bonds – the government or a special purpose vehicle (SPV) or a holding company? Who will subscribe to the bonds and at what coupon rate, will be the crux of the issue?<br /><br />3. If the government issues the bonds, say at 8-10%, and PSBs subscribe to them using the excess liquidity they are holding as a result of demonetisation, the government will have to service the interest component, which could be as high as Rs 8,000-10,000 crore, leading to fiscal slippage. The fiscal deficit target of 3.2% of the GDP will be breached. Worrisome, as the deficit had already surpassed 96% of the budget of Rs 5.25 lakh crore by the end of August itself!<br /><br />4. Post-NPA clean-up of the PSBs, what is the guarantee that the banks will be prudent in lending to the core sectors and corporates? Bankers have become diffident about lending to the growth-engine sectors, who are the major defaulters, as they are scared of punitive actions, forensic audits and subjugation to enquiries by the 4Cs -- CBI, CVC, CAG and the Courts. If all goes well, however, private investment and the capex will be revived, but only after September/December 2018.<br /><br />5. Banks recapitalisation will solve one side of the ‘twin balance sheet’ issue. Corporate balance sheets are still ‘bleeding’ and are trapped in the vicious cycle of bad debts, low demand, meagre earnings and high interest rates on borrowings. The gloom has been further aggravated by the disruption, confusion and dents inflicted by demonetisation, GST and RERA.<br /><br />6. The bailout in the form of recapitalisation of banks and loan waivers to defaulters will send a very wrong signal to prudent bankers (private/public) and good clients, as bad banks are salvaged and unscrupulous bankers go scot-free. This is a serious moral hazard and will have a negative demonstration effect.<br /><br />7. Radical steps should be taken through administrative and banking reforms to privatise weak PSBs while they still have “some intrinsic value” — merge big <br />banks that have synergies for economies of scale, dilute government stakes in PSBs to less than 48% so that bankers can function honestly, independently and professionally, and couple all these with a total overhaul in the salary structure, award and reward mechanism, in sync with the best private banks and global standards.<br /><br />Otherwise, recapitalising banks will not yield results. Rather it will be like pumping oxygen into a dead body.</p>
