Banks to benefit from govt's resolve to keep distance

Banks to benefit from govt's resolve to keep distance

The Centre last week announced its recapitalisation plan for the public sector banks in India. Having allocated Rs 2.11 lakh crore earlier for their revival, it now said that the entire plan will be front-loaded, meaning the government will offload a major part of the money sooner than postponing it for a longer period of time.

It said the amount will be given before the financial year 2017-18 comes to an end on March 31. In a music to the ears of investors and rating agencies, Finance Minister Arun Jaitley made it clear that the allocation will be cash-neutral and hence will not impact the fiscal deficit.

A wise step since the finance minister is going to present the Union Budget in a few days from now when the world will watch on whether he breaches the sacrosanct fiscal deficit numbers or keeps them intact as promised. Of course, a little relaxation is permitted in view of the bold structural economic reforms that India has undertaken in the past year or so.

What is cash neutral?

Cash neutral will essentially mean that the government will take money from the banks by issuing bonds and will use the same money to invest in the equity of those banks. In the process there will be no cash outgo for the government.

The immediate reward the international rating agency Fitch, which has a negative outlook on Indian banks, said it may revise the outlook on Indian banks this year to stable once the government begins infusing the funds. Moody's, which has recently upgraded India's credit rating, said the recapitalisation plan is credit positive for banks as well. To an extent it serves the immediate goal of the government.

The Budget will sail through without any major criticism from the onlookers. Prime Minister Narendra Modi had recently said that our policy framework should be in accordance with the global standards. The globe will certainly the sheer size of recapitalisation. It will strengthen the balance sheets of state-owned banks and help them reduce bad loans.

Along with a whopping capital infusion, Jaitley also announced a slew of measures for reforms in the state-owned banks and a strict surveillance on loans above Rs 250 crore by any PSU lender. Besides, he said that the banks will need to have a minimum 10% exposure for consortium loans, so on and so forth.

Surveillance on whom?

But, a close look at banks' bad loans suggests that a meagre 2% of entire bad loan of public sector lenders comes from retail loans or those taken for home, vehicles or other consumer items. Even those taken against fixed deposits or credit card. It is this loan which is decided by the bankers.

Apart from this, a majority of nearly 20% bad loans or non-performing assets enter the banking system through lending to corporates. Strangely, on these corporate loans the banks have hardly any say. The highest of bank officials usually does not decide on the big corporate loans.

The request comes from the government or at least till recently it came only from the government. So, whom does the finance minister want to keep under close watch? The bankers or the government of the day? The official figures suggest that the retail loans that are decided by bankers are clean.

Secondly, the finance minister also said that the recapitalisation will strictly mean those who perform will get money. A break-up of Rs 1 lakh crore allocated to the banks shows that 20 out of 21 PSU banks got money. Not much weightage was given to their performance.

The third thing that the finance minister said on the day he announced a whopping Rs 1 lakh crore allocation this fiscal was that unlike in earlier days, when industrialists used to take loans from 13-14 lenders, now there will be only 6-7 lenders. This means that only large banks will be able to fund big loans so that the risk is also limited to a few of them in case of default.

At present, the case is not like that and more than half of the 21 PSU banks are on the Reserve Bank of India's radar for a course correction. The smaller banks can take up lending to small and medium sectors of the economy. This will take care of both, the big businesses and the smaller ones.

But, the moot point is that the government of the day needs to discipline itself when it comes to calling the CMDs of banks directly for certain lendings, which eventually turn NPAs. Prime Minister Narendra Modi had, in the beginning of his tenure, said that his government would abstain from the practice. This promise must reduce fresh NPAs.