Union finance minister, Arun Jaitely during press conference held on October 24, 2017 announced a massive recapitalization of public sector banks [PSBs] to the tune of Rs 211,000 crores in two years viz. 2017-18 and 2018-19. Of this, Rs 135,000 crores will come from so called ‘recapitalization bonds’, Rs 58,000 crores via raising capital from the market and Rs 18,000 crores as budgetary support.
Under the project ‘Indradhanush’ launched in 2015, Jaitely had provided for Rs 70,000 crore over a 4 year period viz. Rs 25,000 crores each during 2015-16/ 2016-17 and Rs 10,000 crores each during 2017-18/2018-19 . As per that road-map, the provision for third and fourth year being Rs 20,000 crores – already factored in budget calculations – budget support of Rs 18,000 crores may appear to be well within prudential limit.
It may not be causing any major slippage in Modi – governments’ fiscal consolidation drive which the proposed massive infusion of funds would seem to suggest. But, on a closer scrutiny, it turns out that the scenario may not be that rosy.
In regard to ‘recapitalization bonds’, as per reports, these will be issued by union government and the interest on these bonds would be adjusted against future dividend payments by banks. Most likely, these will be subscribed to by state-run financial institutions such as Life Insurance Corporation of India [LIC] – a tactics which successive political establishments have adopted in the past to bail out any issue made by the government or its agencies/undertakings.
As regards, garnering resources Rs 58,000 crores from the market, Jaitely has alluded to government’s intent of reducing its equity holding in PSBs to 52%. However, considering their weak balance sheets [courtesy, high non-performing assets (NPAs)], there may not be interest among buyers. True, the very rationale of pumping capital is to combat NPAs, but the ‘guaranteed’ amount viz. Rs 153,000 crores [bonds plus budgetary support] is not enough.
According to Fitch Ratings, PSBs would require 90% of $65 billion additional capital needed by banks in India to meet Basel III capital standards which will be fully implemented by financial year ending March 2019. This works out to Rs 380,000 crores and is necessary to raise loan growth, address weak provision cover and aid in effective NPAs resolution. Against this, the proposed capital infusion of Rs 153,000 crores will still leave a gap of Rs 227,000 crores.
With such a huge gap, the balance sheet of banks will continue to be vulnerable. The government will be left with no other option but to pick up the tab as PSBs cannot be left in the lurch. This will cause huge slippage in fiscal deficit resulting in debt level much higher than the prudential limit set by NK Singh committee on review of Fiscal Responsibility and Budget Management [FRBM].
Modi – government deserves full credit for bringing the problem to centre-stage by recognizing NPAs [these increased from Rs 275,000 crores in April 2015 to Rs 733,000 crores as of June, 2017] – a legacy from the past caused by indiscriminate lending without conducting due diligence mostly during 2008-2014. It has followed it by action on fast track and enacted the Insolvency and Bankruptcy Code [IBC] and amendment in the Banking Regulation Act [BRA].
While, IBC gives powers to banks initiate bankruptcy proceedings against defaulters, amendment in BRA empowers RBI to give necessary instructions to banks in this regard. Already, 12 cases accounting for about Rs 200,000 crores worth NPAs have been referred to the National Company Law Tribunal [NCLT]. But, the problem with this mechanism is that on mere reference, the bank has to provide for 50% of the amount and in case, the Tribunal orders liquidation, this would be 100%.
These mechanisms help in ensuring that things do not linger on and the exercise gets consummated within a fixed time frame [proceedings under IBC have to be completed within 6 months]. In future, it will also be helpful in nipping the problem in the bud by enabling banks to initiate timely action for recovery. In fact, the creditor/bank can initiate action even before a loan actually turns in to NPA. But, it does nothing to recover the past bad debts.
Giving money from tax payers’ kitty or premium collected from millions of policy holders is an easy option. The government should avoid it. Instead, it needs to deal with defaulters with an ‘iron hand’. While, contemplating action against them, it should proceed with a conviction that money never gets extinguished. If, Mallya has not returned the loan, it does not mean he lost the money. The reality is he diverted Rs 6000 crores bank loans taken for Kingfisher!
The government should chase the personal assets of hundreds of such Mallayas and shell companies floated by them – besides a host of other assets they acquired with loans taken from the banks. All concerned agencies viz. Income-Tax department, Enforcement Directorate [ED], Central Bureau of Investigation [CBI] and Financial Intelligence Unit [FIU] in the finance ministry must coordinate their actions to nab defaulters and realize all outstanding dues.
These agencies must be strengthened especially by putting in place adequate manpower [recently, there were reports of CBI facing huge manpower shortage at all levels including additional director and joint directors] to pursue cases in fast track mode. The government should also take steps to equip courts to effectively deal with cases [which defaulters file with the sole intent of delaying recovery] and expeditiously dispose them off.
Modi has time and again vowed to recover from looters the resources which belong to the poor and use these for latter’s welfare. In line with this over-arching philosophy, he should get his Team crack the whip on defaulters.