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PSB recapitalisation: Modi govt’s move can be a chance to repair loan books of zombie banks, but rot runs deep


(G.N.S) Dt. 25

New Delhi

Just before the Union Budget, the Narendra Modi government has offered more clarity to how it wants to address the capital woes of the public sector banks (PSBs). Following the October announcement of Rs 2.11 lakh crore package for PSBs, the government has now offered a clear roadmap to front-load the capital infusion in state-run banks.

In a late evening presser on Wednesday, the government said it would infuse over Rs one lakh crore including Rs 80,000 crore through recap bonds and Rs 8,139 crore as budgetary support during the current fiscal. The government will raise Rs 10,312 crore from the market. Of the recap amount, among others the government will give Rs 10,610 crore to IDBI Bank, Rs 8,800 crore to State Bank of India, Rs 5,375 crore to Bank of Baroda, Rs 4,865 crore to Canara Bank and Rs 4,524 crore to Union Bank.

What will this do? Certainly, this capital bonanza comes as an instant relief to ailing state-run banks. Stocks of these entities will rally for some time. It can prepare these entities to continue with the bad loan clean-up process although this round of money will be too little to do anything beyond repairing their loan books.

The total chunk of bad loans in the banking system at this stage is around Rs 9 lakh crore. But, that isn’t all. There is a substantial amount of loans that are being restructured or problematic under the special mention account categories. These loans too can turn bad eventually if the expected economic recovery doesn’t take place as early as expected. A major chunk of the defaulted loans are linked to stalled projects in the infrastructure segment. Unless the economic recovery translates into cash flows, repayment will be difficult from these projects.

The NPA (non-performing assets) may not be over as it appears. The bankruptcy code has brought good changes to the banking system but recovery of money from a corporate house being subjected to bankruptcy proceedings is still problematic area. To begin with, of the several cases moved to the insolvency proceedings, majority aren’t through. There aren’t just enough buyers for such assets at this juncture.

Remember, a company is pushed to insolvency at a time when its cash flows dry up and business takes a hit. How to recover money from such companies post insolvency proceedings if there aren’t enough buyers in the market, is a big question? Asset reconstruction companies are around but these entities are yet to develop a smooth business model in Indian conditions.

Beyond the NPA resolution, the real problem in the Indian banking sector is the continuing existence of a clutch of inefficient state-run banks. These banks have poor management efficiency, high NPAs, dangerously weak capital position, lack of vision, inability to adapt to the new technology and a subservient nature to the majority owner – the government, which means there isn’t real autonomy in business decisions. Some of them are as good as zombie banks with very less chances of survival sans government help. Part of the reasons that made them this way is decades of government control. The micromanagement of these banks were at its peak during the UPA era.

Things have improved since then but the fundamental subservient nature of these banks with regard to the government and vulnerability to follow diktats of directed lending continues. Every year, banks are given higher targets to lend to agriculture without having the freedom to look at the creditworthiness of the borrower. Meeting targets is a must. Similarly, banks are forced to write-off loans every time a politician announces a loan waiver.

Do private banks waive loans—be it corporate or farm– in the same manner as state-run banks do? The trick to save the banking sector is to let them go from government control and let private sector take over these entities. The government can still stipulate directed lending to certain very needy segments. When private sector runs these banks, there will be more accountability and better lending practices. Again, the government need not privatise all the 21 PSBs. It can still retain five or six large banks with state-run character and use them for social sector banking and roll out of government schemes. But, by any yardstick one looks at the sector, we don’t need 21 banks under government control.

Merging weak banks with strong ones or weak ones with weak ones won’t solve the problem. In fact, a weak bank can take down the healthy bank acquiring it by damaging its financial balance. The merger of two weak banks can create a bomb-like situation that can result in much bigger damage to the entire financial system. The Modi government has taken certain the right steps, but it needs to do more. The government’s initiatives such as stipulating at least 10 percent contribution from each bank in a corporate consortium and rigorous monitoring of loans above Rs 250 crore are steps in the positive direction.

But, the ultimate solution lies in privatising a majority of government-controlled banks. Only that can bring about solid accountability and efficiency to these institutions. There is no point hiring a private sector professional to head a state-run bank with all other systems and practices remaining the same. A captain can only be as good as his team. The government does not need to own and run these banks that constitute 70 percent of assets in the banking system. The problem runs a lot deeper and even several rounds of capital infusion cannot come as a panacea to cure the ills of state-run banks unless fundamental flaws are addressed. Till then, only punters in the stock market will really benefit from such exercises being carried out using taxpayer’s money.

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