Capitalising banks not enough

Most of the NPAs have been caused by infrastructure projects. These require a special package to come out of the woods. Normal turns in business cycles are not going to help them.

Updated - December 04, 2021 11:16 pm IST

Published - August 10, 2015 02:36 am IST

A few days before the scheduled announcement of a credit policy review by the RBI, the Union Government announced an ambitious plan for recapitalising public sector banks (PSBs). That most PSBs are woefully short of capital is well recognised. New international standards for capital adequacy, referred to as the Basel-III norms, take effect from end of 2017. Raising additional capital on their own to meet those levels is simply not possible for most PSBs in their present state. Besides, their very high levels of non-performing assets (NPAs) tieup their existing capital through provisioning. This naturally restricts the ability of the PSBs to lend more. Obviously, banks will have to support the growth process.

Over the years, the government has been supporting the capitalisation programme through the budget. For the current year, the budget has provided a measly Rs.7,940 crore but not even half way through the financial year, the NDA government has had a major rethink.

The latest plan is to pump in Rs.70,000 crore over four years in a staggered manner — Rs.25,000 crore during this year (2015-16) and a similar amount next year. During the two years beginning 2017-18, PSBs will get Rs.20,000 crore. The sharp tapering off of government support is most probably based on the calculation that the PSBs having been given a helping hand will take care of themselves. That is a bold but not exactly a new proposition. But more than previous years, the favourable outcome of capital infusions will depend upon how quickly the PSBs adapt themselves to an environment marked by reforms.

Two important points here (a) the revised allocation for public sector bank capitalisation for this year (at Rs.25000 crore) is nearly thrice what was proposed initially. That shows how deep the capital requirements of PSBs are. (b) The second related point is that an allocation of Rs.70,000 crore over four years looks impressive. Banks, while welcoming the package, say that the requirements are much higher — more like twice the amount (Rs.1,40,000 crore).The government appears to have arrived at a similar figure after taking into account profits generated internally.

The government’s approach to bank capitalisation has been ambivalent, to say the least. All governments have talked of encouraging consolidation among PSBs. This has been a highly theoretical proposition, especially because of the government’s assurance that bank consolidation will not be dictated to by the government but be market-driven. Nobody, except the self-serving bank heads, believe that a market-driven merger is possible given the present state of most PSBs.

A forced merger, however, has invariably landed both the parties in a mess. Policy confusion in this area is seen by the sharp u-turns the government has taken in providing capital to the banks. As recently as in April, the government had decided to allocate relatively small sums out of its capitalisation budget to banks on the basis of efficiency parameters, which, not surprisingly, ruled out the bigger banks. “Improve your performance and qualify for our money,” the government seemed to suggest.

The recent approach reverses the policy direction — only a fifth of the much larger capitalisation budget would be linked to the bank’s performance. That might enable them to do a holding “operation” but not expand their loan books significantly. (For a few of them, it might be a blessing not being able to lend, however ludicrous that idea might sound. But that is a different story).

Bank reforms

For most commentators and governments, the favourite prescription for banks to get back to health and be able to raise their own capital is for them to espouse reforms. As far back as the early 1990s, the Narasimham Committees 1 and 2 drew an outline of such reforms, to which many others supplemented. Some of these, such as new accounting norms, paved the way for truer and more transparent bank balance sheets. But a core recommendation to spur consolidation, thereby getting around the problem of capital inadequacy, has remained on the drawing board.

More than a quarter century later, PSBs are still battling with the problem of wrong perceptions about them. That in fact is the real stumbling block — to among other things — raising capital. For many reasons, the government will not let go its majority ownership in PSBs. It will not permit its shareholding to fall below 52 per cent.

Various expert groups have suggested ways of getting around this. The P. J. Nayak Committee suggested creation of an investment trust or holding company to which government’s shares will be vested. The Committee was asked to recommend measures to improve governance in the PSBs.

The question remains: Is government ownership a health or hindrance in raising capital by banks?

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