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The change
By announcing a recapitalisation package of ₹70,000 crore for FY20, the Finance Minister has appeased the market, no doubt. But by laying down no concrete roadmap for consolidation or governance structure in PSBs, the Centre’s largesse could end up only as a stop-gap solution to bank woes. The Budget has also proposed TDS at 2 per cent on cash withdrawals by a person in excess of ₹1 crore in a year. To drive digital transactions, the Centre also proposes to remove charges on digital payments at business establishments with annual turnover exceeding ₹50 crore.
The background
While bank credit growth has bounced back to double-digits in FY19, it has been led by unsecured retail loans. Credit growth to industry continues to languish in single-digits. A BusinessLine analysis shows that State-owned banks have reduced their exposure to risky corporate assets to conserve capital. Larger and relatively stronger banks such as SBI and BoB have also been shying away from lending to riskier segments, creating a void in the credit demand of the economy.
This brings us to the perennial issue of ‘throwing good money after bad’ under the Centre’s recapitalisation agenda. The humongous ₹1.9-lakh crore of capital infused into PSBs in the last two fiscals alone (through issue of recap bonds that don’t count under fiscal deficit calculation) have been sucked into banks’ provisioning, rather than aiding growth. The Centre’s largesse last fiscal helped pull a few PSBs out of the RBI’s prompt corrective action (PCA) framework. Since January, five PSBs have been taken out of PCA.
The verdict
In the Budget, the Centre has stated its intention of merging various PSBs and pulling some of these out of PCA. But the Centre will have to hasten reforms to materially improve the governance in PSU banks alongside. Also, while the ₹70,000 crore that is proposed to be infused, is a tidy amount, it will help growth only to some extent. The large chunk of bad loans on the books and poor recovery from IBC will continue to weigh on banks’ earnings. As such, bankers have turned risk averse to lending. It is also unclear how the capital will be apportioned among the various PSU banks.
The proposals to increase digital transactions can be burdensome for banks. Keeping track of withdrawals above ₹1 crore will be difficult, more so as customers have multiple accounts on which they transact. Having to bear costs (Merchant Discount Rate) can dissuade banks from putting up more POS terminals. As of May 2019, SBI had 5.89 lakh PoS terminals, Axis Bank 4.96 lakh, HDFC Bank (5.63 lakh), and ICICI Bank (3.59 lakh). Totally, there are about 82.4 crore debit cards with just 38 lakh PoS terminals.
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