PSU bank recapitalisation is urgent, but questions remain on the allocation of funds
On what basis did IDBI Bank, with highest percentage of bad loans, get the maximum capital inflow?
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In October 2017, Union finance minister Arun Jaitley announced that public sector (PSU) banks will be recapitalised with funds worth Rs 2.11 trillion over a period of time, as a measure to keep from afloat, awash with capital, and healthy. In continuation of that move, Centre has announced allocation worth Rs 1 lakh crore, of which Rs 80,000 crore will be allocated to 20 PSU banks by March 31, 2018, that is by the end of the current fiscal year.
While 11 "weak banks", under the Reserve Bank of India's (RBI) "prompt corrective action" (PCA), there are nine PSU banks that are not classified under extreme distress, but nevertheless have been given funds to ramp up their capital, and thereby lending capacities. The move, it has been widely accepted, has been done to relieve the banks of the growing burden of non-performing assets (NPAs), and help them keep the credit line open by beginning to lend again.
While the logic for bank recapitalisation is fiscally strong, and indeed the only viable option, it's the manner and layout of the allocation that should ring a few alarm bells. Eleven "weak banks: are to be given a sum total of Rs 52,311 crore to "maintain their minimum capital requirement", while nine strong banks would be receiving Rs 35,828 crore.
The case of IDBI Bank
Yet, the most perplexing question is this: why is the IDBI bank, which has the highest percentage of bad loans/NPAs, at 24.98 per cent, receiving the maximum capital infusion of Rs 10,610 crore? There has been talk of the government looking to privatise IDBI Bank, and, FM Jaitley has underlined that still is the intention. In that light, why is a bank that has indulged the most in reckless lending to wilful corporate defaulters, including to the tainted liquor baron Vijay Mallya, should be given such preferential treatment, that too before it gets privatised?
"One of the objectives in supporting the non-PCA (Prompt Corrective Action) banks has been that these are the banks where robust lending has to take place so that they are able to support growth, lending and the economy itself. For the PCA banks, the principal object appears to be that they maintain their regulatory capital. And that is the criteria that is being followed for the IDBI. The original decision stands, it has not been reconsidered but then there is always a time in implementing the decision," Jaitley had told mediapersons while unveiling banking sector reforms on January 24.
Yet exactly why would a PSU bank would be nursed back to health with tax-payers' money and then privatised remains a dangling question that demands answers from the government.
Weak and strong banks
The point of capital infusion into the banks is about preventing them from going bust by breaching the minimum capital requirement, amount of NPAs and return on assets. It's the RBI that enforces these guidelines to "put the house in order", as it were.
It's therefore interesting to note that the 11 weak banks have been given a lion's share of the recapitalisation funds. Following IDBI Bank, we have Bank of India with 12.6 per ecnt of gross NPA receiving Rs 9,232 crore, UCO Bank with 19.74 per ecnt of gross NPA at Rs 6,507 crore, Central Bank of India with 17.27 per ecnt of gross NPA at Rs 5,158 crore, Indian Overseas Bank with 22.73 per cent of gross NPA getting Rs 4,694 crore.
Of course, the government has justified the higher capital ratio for weak banks saying it's only for the minimum capital requirement bar. But experts have said this "classic parenting technique" would encourage more heedless lending, often at government's behest, thereby adding to the woes of the banking sector.
On the other hand, strong banks such as State Bank of India with 9.83 per cent of assets clubbed under GNPAs has got Rs 8800 crore, followed by Punjab National Bank, with 13.30 per cent as GNPAs, etc. This also includes Bank of Baroda, Canara Bank, Union Bank of India, Syndicate Bank, Andhra Bank, Vijaya Bank etc.
As announced, the sum total of Rs 1 lakh crore capital infusion by March 2018 will be achieved by a mix of funding methods, including the Rs 80,000 crore of recapitalization bonds, rs 8.139 crore through Union budget support and Rs 10,312 crore via "funds raised from the market".
While banking secretary Rajeev Kumar has said that the capital infusion would increase credit deployment by Rs 5 lakh crore in the economy, the "no-strings-attached" help is being frowned upon already.
What about recovering NPAs?
With the NPAs now at an astronomical Rs 10 lakh crore, a burden mostly shouldered by 20 PSU banks, it's puzzling why the government talks of bank recapitalization without tightening the leash around the willful defaulters. While RBI has identified the main defaulters, about 50 major corporate behemoths some of whom have escorted Prime Minister Narendra Modi to the World Economic Forum at Davos, the reluctance on the part of the central bank to name and shame the defaulters allows them the leg space to get away without punitive actions.
The bank bailout schemes of successive governments while keeping the sector afloat encourages reckless and unprofessional practices to fester, and the distribution of capital, in the name of meeting the benchmark, actually rewards reckless. Throwing lifelines to failing banks that have actively participated in crony capitalism is unacceptable, since there's very little or no price to pay for past breaches. Only in December, we saw how bad loans worth Rs 55,356 crore was written off to save the PSU banks, to make the balance sheet look good, but actually weighing the institutions down some more.
In this light, the annual EASE (Enhanced Access and Service Excellence) index survey of banks has been announced, yet whether or not this external ranking and auditing method would yield results is something that will be closely observed.
Errant institutions over citizens?
It's also worthwhile to note that the governmental generosity towards institutions like banks and corporations comes at the expense of treating the citizen-customer shabbily, especially the ordinary account-holder with basic savings accounts. The forced link of bank accounts with Aadhaar is something that has been in the spotlight for long, and has garnered much criticism in addition to being debated in the Supreme Court of India.
Exactly as PSU banks forced to lend as part of government-corporate nexus to keep the money flowing are given more money, citizen-customers are faced with fines over minimum account balance, or the even worse bail-in clause in the FRDI Bill that automatically turns an account-holder's savings into some form of bank shares by a distribution jugglery that keeps the bank from breaching the minimum balance level.