RECAPITALISATION OF BANKS – A SMART BAILOUT

about 2 years ago
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By Ruma Dubey

When money is poured into Air India, we all cry and wail, complaining that there is so much good money chasing bad money and how taxpayers money is being used for the wrong reasons.

And now we have the Govt bailing out the PSU banks. Last time, when the Rs.70,000 crore recapitalization was announced, all said that it was too little and maybe this was a way of the Govt showing that it was withdrawing its tight, noose-like hold over the banks.

But given the kind of dire straits the banks are in today and more trouble expected till all bad debts are provided for (that’s a tall task!), and the kind of image-bashing which the Govt is facing today, it probably felt maybe this would perk up the markets and the economy – strictly in that order.

In this current bailout, errr, recapitalization plan, the Govt would be infusing Rs.2.11 lakh crore in PSU banks. This would be over a period of two years. The smart thing here, which seems more like “financial adjustment in the books” is the way in which this money is being provided – spread over a period of two years, 64% of this recap money, Rs.1.35 lakh crore would be in the form of bonds – recapitalization bonds. The balance, Rs.65,000 crore will be through the budget.

Recapitalization bonds are used as payment for the shares bought by the government to ailing banks. The problem is not of liquidity and most certainly not of solvency but the issue of inadequate equity capital with the banks for meeting the regulatory requirements to raise more funds. Thus by issuing these bonds, the Govt is meeting a technical requirement without putting the fiscal deficit in too much jeopardy.

Talking about fiscal jeopardy, what needs to be seen is whether these bonds are issued by the Govt itself or would it be through its companies. If the former is used, there could be an issue with rating agencies but in all likelihood, it would be through Govt PSUs.

This tackled the question though which remains to be asked is whether this is like Air India, allowing good money to chase bad money.

At the moment, this was probably the best option. But what is crucial at this juncture is to see the recapitalization being followed up with strong reforms in the banking sector. It should begin with giving the banks the complete autonomy and the freedom to function like a prudent bank and not like a fiefdom of the Govt. That in itself will ensure that 50% of the bad loans come down. The Govt has only been talking about giving PSU banks operational freedom since 2015, nothing has happened till now. If this is not corrected, bailouts will become a ritual.

The Govt owns these banks but it should restrict its sense of ownership to directing banks when it comes to priority lending but beyond that, PSU banks should be allowed to function like a true commercial bank.

There was also tall talk about eventual privatisation of banks. Given the brickbats it is facing over GST and demonetization, it is doubtful if the Govt will follow through with this any time soon.

The Govt has found a smart way out this time around but the sad truth is that underneath it all, the muck and stink remains; unless that is cleaned up, we are only indulging in cosmetic surgery.

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