Missing pieces

| Updated on January 17, 2018 Published on July 21, 2016

The Centre’s recapitalisation plan for PSBs is timely, but it should insist on accountability

With bank credit growth slumping below 10 per cent early this year and not rising since, concerns are mounting about how economic revival can be sustained without adequate credit flow to industry. This seems to be a key reason for the Centre’s decision on Tuesday to set aside ₹22,915 crore, 92 per cent of its targeted allocation for FY17, towards capital infusion into public sector banks. It is welcome that the recapitalisation package has come at the beginning of this fiscal year instead of the fag end, and that 75 per cent is to be released immediately. With accelerated bad loan clean-ups forcing banks to report sharply higher non-performing assets (NPAs) in recent quarters, this pre-emptive infusion may help reinforce both depositor and investor confidence in state-owned banks. With deposit growth at multi-year lows and stock prices of most PSBs languishing below book value, a confidence booster is quite badly needed.

But what is puzzling is the manner in which the Centre has selected the banks that qualify for this recapitalisation exercise. Whilst announcing its Indradhanush revamp package for PSBs in August 2015, it had clearly specified a game-plan of allocating 40 per cent of the funds to the top six banks which ‘play a vital role in the economy’ and the rest based on performance parameters. But recent recapitalisation packages seem to have strayed from this. This year’s plan for instance, leaves out Bank of Baroda and IDBI Bank from the top six, while sweeping in the smaller Central Bank, UCO Bank, Syndicate Bank and United Bank. Sizeable capital has been allocated both to strong banks such as State Bank of India (better placed on NPAs and tier 1 ratio), and beleaguered ones such as Punjab National Bank and Central Bank, whose GNPA ratios top 10 per cent. Some distressed banks find no mention. It would be unfortunate if the Centre has diluted its performance accountability norms in its urgency to shore up public confidence. Having deployed much of its recapitalisation kitty for the year, the Centre should now tighten the screws on performance.

This is critical because, even according to the Government’s own estimates, this recapitalisation package will take care of just ₹70,000 crore of the estimated ₹1.8 lakh crore needed until FY19, to meet Basel III norms. Private researchers peg the sum at over ₹2.5 lakh crore. This suggests that most PSBs will need to aggressively tap the markets for capital over the next three years. While stronger banks may face no problems, investors may not readily sink capital into deeply distressed banks. This means the Centre needs a plan B on recapitalisation. Here, a variety of alternatives have been suggested, ranging from recapitalisation bonds to preference shares and shares with differential voting rights, which must be seriously examined. Governance reforms at PSBs, spearheaded by the new Bank Boards Bureau, also brooks no delay.

Published on July 21, 2016
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