One more Bank Recap: More Cons than Pros
Debashis Basu  25 October 2017
The ministry of finance has announced as new scheme to capitalise public sector banks, which were reeling under the under the weight of bad loans and corruption. Under the scheme, the government will pump in only Rs18,000 crore of equity into public sector banks (PSBs), over the next two years. The banks will have to raise Rs58,000 crore from the market. Finally, the government will issue bonds worth Rs135,000 crore which the banks will buy. It is not clear whether the government will put back the money from bond sales as equity into banks and if yes, when with that happen. What the pros and cons of this move? 
The most popularly shared benefit of the scheme is this. Banks will get more capital to lend. It is being argued that the economy is in a downturn because the PSBs are not able to lend. They need capital support. With more capital, PSBs will be able to write off the bad loans (which they have been unwilling to do for fear of eroding their capital) and still be able to lend more. The scheme enables the government to inject capital without budgetary support and impact on fiscal deficit. Once the banks start breathing easy, the government can also push for bank mergers. One other benefit, probably in the distant future, is that the government can get the upside from equity returns once the “recovery cycle” starts. 
There are too many cons, in our view. 
1. Too Little: This money is not enough according to analysts. After all, the bad loans were an astounding Rs7.33 lakh crore in June 2017. By some other estimates, the figure is close to Rs10 lakh crore. Of the package, Rs18,000 crore has already been allocated under the Indradhanush scheme. 
2. Tiny Amount of Fresh Capital: While the scheme will encourage some amount of lending, it is not clear whether the government will promptly reinvest the money from bonds into the banks and in what form. If the capital injection by the government is too little, too late, banks would be worse off, after being drained of the liquidity. Even if the capital injection happens, the banks do not get any fresh capital (except the Rs58,000 crore they will raise from the market).
3. Low Borrowers’ Appetite: It is not clear, given the systemic shocks unleashed by demonetisation, the shoddy implementation of Goods and Services Tax and lack of any improvement in ease of doing business, what kind of risk appetite is there among businesses to borrow more at this time. Remember, apart from loans, many cash-strapped businesses need equity capital as well.  
4. Redemption Unclear: The government has not clarified how the Rs1.35 lakh crore bonds will be redeemed. Can the banks sell these bonds? Will the bonds be marketable in any other manner?
5. No Governance Strings: The scheme does not make the PSB boards and top management accountable in any form. PSBs are in the current position because of rampant corruption. The Modi government has been attempting to fix PSBs through several half-hearted moves over the past three years. It seems to have ultimately given up on that that tough but the right path to fix the mess of PSBs. 
All the move really does is to boost the flagging credibility of the government in taking “bold steps” to fix the banking mess. Expectedly, ratings agencies have hailed the move. But it will merely reduce the near-term risks facing the banks. To think that this would kickstart growth and investment cycle is far-fetched. Finally, a recapitalisation process that has failed in the past, allows crony capitalists to get away with wilful default and does nothing to solve the problem of corrupt and careless lending practices that is the root of the problem.
Ramesh Poapt
4 years ago
such few steroid doses to ICU patient, will make him 'salable' and buyers ready in 3 yrs..
Ramesh I
4 years ago
I feel by this decision the Govt is merely throwing good money after bad. While PSU Banks, which are heavily burdened by high NPAs, do require recapitalization, the Govt ought to carry out few structural reforms and radically change policies regarding operational autonomy of PSU Banks. After all, most large NPAs are due to FM or FinMin babus making those persuasive phone calls to PSU Bank CEOs. So, Govt should first cut that phone line between North Block and Banks. Govt ought to also empower Banks to enforce the Bankrupcy laws more aggressively to acquire / auction stressed assets of large borrowers like the Mallyas. Meanwhile, Govt ought to cap / reduce salary hikes to PSU Bank staff for the next 5+ years as they are already being paid highly compared to their private sector Bank counterparts, with much less accountability and efficiency. Lastly, though PSU Banks have been kept afloat by successive Govts with taxpayers' money, Govt should withdraw from funding Banks and make them more operationally autonomous and let market forces determine their viability. Close them if that's what is needed. After all, Govt can use the tons of money it pumps into grossly inefficient and unprofitable PSU Banks in welfare schemes for citizens, which would be more politically expedient for them as well. India should move away from its socialistic mindset and move towards a free market economy to make its own enterprises competitive and self-sustaining.
Replied to Ramesh I comment 4 years ago
Very correctly stated. This government has no accountability towards how tax payers money is being spent. Fast forward 10 years from now, these PSU banks will be begging for another round of recapitalisation.
4 years ago
So basically, after heaping scorn on "corrupt UPA government"and trying to show its holier than thou image by declaring several badly executed strikes on ""black money holders", in reality mules or those who fell foul of some procedural intricacy, this government is offering a olive branch to the same crony businessmen who siphoned off questionable loans and with no intentions of repaying them. Well, 2019 elections are a coming, and this government has constantly shown itself to be politically smart, and governance wise incapable. Lets see things for what they are, and not through rosy hued glasses.
Subramanian Angarai Raghavan
4 years ago
Implement the new KYC norms seriously across all banks as a preventive measure
Subramanian Angarai Raghavan
4 years ago
Setup a SPV Bank to take over the NPAs of the struggling PSU banks at a value equal to the proposed equity infusion, infuse the equity into the SPV and pay off the discounted values to the PSU banks. SPV shall keep the pressure on the borrowers, invoke the power through insolvency law and NCLT and realise the debts more than the book value
Replied to Subramanian Angarai Raghavan comment 4 years ago
I dont think a Bad Bank would help, as a lot of information on the borrower would be lost in this transfer. We may well find the same borrowers continue to transact at their banks while the Bad Bank keeps making calls to them or prosecutes them for non payment. We know how well our corrective systems function, dont we?
4 years ago
Most of the bankers are corrupt , willing to give loans to wealthy and rich who are not interested to pay back . We can see many companies declaring losses eroding the share value but the promotors are enjoying and re routing the funds like bank loan etc fraudulently ex Vijay Mallya . I hope wisdom prevail , the govt stop funding the banks which are corruption centres . Bankers like to give loans to people who are not interested to pay back as they grease the palms which ordinary people do not do and normal people in this country are not able to get loans from banks .
S K Rai
4 years ago
The line has to be dawn somewhere and it has been drawn at the current government by many after ignoring the present situations as result of past deeds. The banks are not cash starved neither lack equity given their size and capacity more so post demonetization. Enough of liquidity is available with banks only dearth is of good borrowers. No doubt, improper banking, lots of misappropriation of funds, corruption etc. have given way to NPA of a whopping amount of nearly 7.50 lakh crores. Pumping of country's hard earned money (equity capital) into the banking system is not necessary at this juncture. This will give room to the willful defaulters and the corrupt officials to play more foul. Merger is a good proposition to consolidate the scattered banks and the banking system. Besides this the respective bank authorities must be held accountable in hierarchical order for defaults and they must fear for their posts (losing the job) like in the private banks to fix the banking mess. Just an opinion in my own view.
c babu challa
4 years ago
Any scheme that the government brings will be viewed in suspicion. As there is no proper thinking to really improve the situation. As such the literate circles feel that the government bosses are short of thinking capacities or the big bosses donot listen to the advice. This has been noticed during demonotisation and around 42 amendments curbing withdrawals as it was illplanned and also GST the same results. Government has lost of the confidence of people.
4 years ago
Bank recapitalisation will not help.Public sector banks credit system needs to be reviewed.Appraisal, disbursement, followup all these have to be revisited.Today the credit team does not have the skill set. How leading private sector banks (read HDFC Bank)is coping with credit with much less NPAs. PSB top management should engage in a dialogue with their counterparts in private sector banks to revamp the credit system.The Government is not aware of this.Unfortunately people who matter are not taking the initiative.
Mehernosh Dordi
4 years ago
Totally agree with your views. Catch the corrupt bank officials and punish them publicly. It is they who made money out of demonetisation in the first place.
Suman Mondal
Replied to Mehernosh Dordi comment 4 years ago
Correct. Govt should fix the main problem of corruption in PSB. Also not sure how money will be infused.Union Bank has a MCap of 12K Crore,UCO has MCap of 6K Crore ,Now with this recap Govt will end up owning 80-90% stake.So what about this equity dilution .Govt has to service debt and it will cost 8K-9K Crore so will there be extra pressure to this PSB for Dividend.Will govt start to offload this stake again in say 2020 in market.Many things unanswered.
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