Move on banks' capital base wrong

The government’s plan to improve the capital base of public sector banks by infusing Rs 70,000 crore over the next four years into them will not by itself steady the deteriorating health of the banks. In the first place, the infusion is much less than what the banks need. They are estimated to need about Rs 1.80 lakh crore for capital replenishment in the four-year period. They are also expected to require over Rs 4.5 lakh crore by 2018 to comply with the Basel II norms. In view of this, what the government proposes to inject into the banks is only a fraction of the requirement. But adequacy is not the only issue. The more important questions are why the government has had to use the tax payers’ money to improve the finances of badly run public sector entities and whether the new capital will be put to good use in future. In the past also, the government has done this but the banks’ finances have only become weaker. It now also proposes to forgo the dividend from the banks. This also is not a good practice.

Public sector banks have found themselves in this unviable situation because of the bad loans they have extended in the past. Their books are laden with stressed and non-performing assets for which provisioning has to be made. It is estimated that about 10 per cent of the loans have gone bad. The PSBs are in this situation because of their bad lending practices and poor governance. Political and other wrong considerations have influenced their lending decisions and adversely affected efforts to recoup the money from debtors. The much better situation of private banks in this respect makes this clear. Unless the financial support for banks is made conditional on improvement of their balance sheets and drastic reduction in NPAs, the capital infusion strategy will not yield good results. Wherever needed and possible, banks should take over the management control of projects of defaulting debtors by converting loans into equity. Legal provisions for this are available. The projects can then be sold to new entities and the loans recovered.

There is the need for improvement of governance and efficiency levels in PSBs. The CEOs can now be selected from outside but this is not enough. The banks should be given more functional autonomy and the work culture should improve. Without adequate capital, banks cannot lend money and availability of credit is important for economic growth. The PSBs are the major source of credit in the country. So, their health is crucial for the performance of the economy.

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