Into a black hole

The Centre is making the same mistake year after year by pumping in taxpayers’ money into public sector banks, thanks to its reluctance to let go of its majority stake in them. After the Centre’s big bang infusion of ₹90,000 crore in FY 2018 fell flat on its face, the ₹48,239-crore infusion into 12 public sector banks this fiscal (aside from the ₹25,000-odd crore done so far) does little to restore investors’ confidence in these banks. For one, the optimism after the announcement of the massive capital infusion in FY18, fizzled out after the RBI’s February 2018 circular. The circular did away with the old restructuring schemes, leading to steep rise in bad loan provisioning for PSBs in the March 2018 quarter. A loss of ₹62,000 crore and incremental addition of ₹1.2-lakh crore of NPAs in the March 2018 quarter alone saw most PSBs knocking on their benefactor’s door. While addition to bad loans has since moderated over the past three quarters, they are still at elevated levels. Large haircuts and higher provisioning on accounts under IBC continue to eat into banks’ earnings. The current infusion can get sucked into banks’ bad loan provisioning, bringing these banks on the verge of breaching their capital requirements. Two, in the big bang recap last time around, the Centre had bucketed banks into weaker (PCA) and stronger banks (non-PCA) banks — giving a handsome 40 per cent of the capital to the latter in a bid to revive credit growth. This time around the entire capital has been given to 12 PSBs to ensure that they don’t breach the PCA triggers and maintain minimum regulatory norms. Such short-term fixes may increase moral hazard, in the absence of governance reforms, even as credit needs of the economy remain unmet. Of the 12 PSBs, six are still under PCA, and four are non-PCA banks that could breach PCA thresholds if not for the Centre’s largesse.

Concerns on credit growth need to be addressed. PSBs that constitute over two-thirds of lending, continue to report modest growth — latest December quarter figures reveal that the loan book for most banks has shrunk. A BusinessLine analysis shows that between September 2017 (before the FY18 mega bank recap) and December 2018 quarters, risk-weighted assets for most PSBs have fallen by 15-20 per cent. With even the larger and relatively healthy banks such as SBI and Bank of Baroda shying away from lending to riskier segments to conserve capital (not among the 12 PSBs in which capital is to be infused) the wider implication of such lazy, narrow banking is a cause for worry.

The Centre appears to have also dipped into RBI’s coffers to meet its recap agenda. The fiscal estimates for FY20 factor in a whopping ₹83,000 crore of dividends from the RBI, PSBs and FIs. Will funding capital-starved PSBs from the RBI’s surplus become the norm?