The recapitalisation plan of ₹2.11 lakh crore for public sector banks announced by the Finance Minister is a belated recognition that fixing the problems facing banks quickly is the key to achieving higher economic growth.

The economy has been slowing during the past year, which has been subject to some shocks such as demonetisation and, more recently, the introduction of the Goods and Services Tax (GST).

Public sector banks (PSBs), burdened by bad loans that doubled in the past five years, have slowed down their loan growth. Credit growth for the entire system has been a measly 6.9 per cent compared to 10 per cent in the previous year. There are two milestones ahead that definitely lend a sense of urgency to the recapitalisation move. One, general elections are due in the summer of 2019. The government needs to show visible improvement on the economy and jobs fronts to get re-elected.

And, two, banks have to be recapitalised by 2019 to be compliant with the Basel-III frameworks. Rating agencies have estimated that Indian banks need ₹4-5 lakh crore for the same. A couple of banks are already close to the regulatory minimum capital due to the erosion of profits over the past few quarters. During the last three years, the government has been making measly allocations in the Budget and rationing capital — linking it to achieving some performance metrics through its much-touted ‘Indradhanush’ programme.

Of course, it always said that capital would not be a constraint but that it would go to those banks which showed results. The implied sub-text was that those who didn’t perform would just have to shrink their books, weaken and perhaps get merged with stronger banks.

While this may have worked in a booming economy, and may have succeeded, given a longer time frame, those luxuries are unavailable now. The plan to revive banks through mergers certainly didn’t gather the necessary speed — certainly not fast enough to deliver the results required and get the economy moving fast once again. The exception to this was the SBI merger process (merging its associate banks and Bharatiya Mahila Bank). But this was a comparatively easier thing to put through, given the shareholding pattern, synergies and similar culture. The recapitalisation plan for public sector banks must, therefore, be seen as a preliminary step to get growth back on track and help revive bank lending as well as investment.

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