The Union finance minister is back. And with a bang, a sort of live-saving oxygen for the public sector banks that have been gasping for breath for long. While everyone was finding fault with the government for its Goods and Services Tax (GST) and demonetisation, Arun Jaitley had a quick-fix plan for the banks.
The announcements he made during the Press conference last week were certainly hailed by the media. And why should they not be? After all, they sought to cure the ailing banking sector and to revive the economy.
Until these announcements, the government was satisfied with its 2015 recapitalisation plan of infusing Rs. 70,000 crore over a period of four years. Despite pleas from different corners, including the Reserve Bank, the Minister was not ready to move from his rigid position.
The pleas then took the form of appeals. At times, people were also emotional. For instance, the RBI deputy governor, Viral Acharya, said, “Every few days, I wake up with a sense of restlessness that the time is running out.” He was stressing on the need for reforming the banking sector.
The economy is not in the pink of health. Nor are the banks. The GDP growth rate is not even close to the double digit mark the government wanted it to touch. All this is because of demonetisation.
The banks are struggling with non-performing assets (NPAs) and the figure seems to have been increasing at a very fast pace. What else can save the government, particularly at a time when elections are close? Nothing else than a Press conference to quote huge figures and, thereby, grab media attention and to make a promise that things would be set right. In short, to send a message that the government is really serious about introducing economic reforms. Yes, this is exactly what happened.
After a long dissertation of self-praise quoting what the government has done so far and how the Indian economy is still one of the most robust in the world, the government announced the so-called bail-out plan for the banks. Instead of the four-year plan of infusing Rs. 70,000 crore into the PSU banks, it has now come up with a two-year plan of injecting Rs. 2.11 lakh crore into the banks.
Now the question is: When the government does not have money to infuse capital, how can this ambitious plan take off? Will this money be sufficient for the banks? And will this recapitalisation end the long saga of NPAs that these banks have been telling so far? Or, are we throwing our hard-earned good money against bad money?
Out of Rs. 2.11 lakh crore, the government will use Rs. 18,000 crore from the budgetary allocations for buying the shares of these banks. The banks have been asked to raise Rs. 58,000 crore from the market. And the balance Rs. 1 ,35,000 crore will come from an otherwise vague source (perhaps even Jaitley is not sure). The government said it will issue bank recapitalisation bonds to raise these resources for purchasing more shares in public sector banks.
The money collectively is huge, much more than Reliance Jio’s debt, something the government can be proud of. After all, it is a reasonably good record to beat. However, the relevant reports suggest that the banks need more than Rs. 5 lakh crore to actually come out of this vicious circle. They are right now sitting on a huge pile of bad loans amounting to around Rs. 8 lakh crore. More than 70 per cent of this huge pile is from a handful of big companies, whose promoters or directors happen to be very close to some big shots, either in the government or in the top management of the banks.
This huge chunk of bad loans has actually eroded the capital-base of the banks. Now let’s see how it happens. Banks are required to meet capital adequacy ratios before they can lend money. The Basel norms specify an 8 per cent capital against the money lent. The RBI stipulates that it should be 1 per cent higher than what the norms say, to be on the safer side. To make the calculation easier, assuming 10 per cent capital requirement, the bank is required to have Rs. 100 as capital, if it gives Rs. 1000 as a loan.
In the situation of the lender defaulting in repayment of say 50 per cent of the loan, the bank’s capital gets eroded by Rs. 50 and the ratio falls below the 10 per cent. Now the bank has two options — to raise the balance capital or to stop lending. Considering the kind of bad debts, it is difficult to raise money. For long, the banks had no capital and hence they had stopped doing business and concentrated more on retail lending, instead of corporate lending.
In such a scenario, the government’s capital induction plan seems to be a breather for the banks as they will be able to transact and give loans. At a time when the fiscal deficit has already reached Rs. 5 lakh crore, how the government will get Rs. 1,35,000 crore. The answer is financial engineering or juggling, to be very frank.
The government will be issuing recapitalisation bonds, which will most likely be bought by the banks. In other words, the banks will give money to the government which, in turn , will buy the shares in these banks. Now what kind of capitalisation is this? If the banks already had enough money, why the government should term it recapitalisation? But this will certainly increase the fiscal deficit.
There is another speculation. A leading daily has quoted that since the government does not want to increase its fiscal deficit, it will float a special purpose vehicle (SPV), which will issue government bonds. This, again, will just be an accounting trick, where the government’s liability will be shown in the books of another entity.
In other words, there is no clarity as to how the government will fund this scheme. On a second thought, since only Rs. 18,000 crore will be spent from the allocated budget, which is similar to what the government planned in 2015, there seems to be nothing new in this scheme.
The government’s recapitalisation plan is a mere paper entry, a mechanism to show healthy balance sheets of the banks. At the same time, it also reiterates the fact that the government does not want to do away with its ownership in these banks despite huge disinvestment targets.
And what about reforms? Jaitley Saab said, “Bank reforms would be announced soon”. May be he is waiting for another Press conference to repeat the same statement again. And people like Vijay Mallya can easily escape the law. This recapitalisation, or whatever it may be termed, will also encourage what is called moral hazard – a tendency to go easy when the risk is insured. In other words, the banks may go easy on lending money quickly and may not follow the standards for lending.
Is this great Indian bailout program also a bailout scheme for the defaulting promoters? Ideally, it should not. But when the banks can write off the losses that they have incurred over these years in the name of recapitalisation, why should they care about recovering bad loans and getting into a tedious system of selling the assets?
Instead of thinking of financial jugglery, the country would be better served in case Jaitley and company go overboard to book the defaulting corporate bigwigs, who have been taking the general public for a ride for long. We would certainly like to hear this in a sudden Press conference. Instead, announcements of this kind serve no good. The banks will continue to suffer irrespective of what the government does if the credit culture is not changed and politicians continue to rule the banks.
The writer is a company secretary and director, communications, Deepalaya, Email: email@example.com