Temporary reprieve

The Centre’s proposal to infuse ₹70,000 crore of additional capital into public sector banks over the next four years is a long overdue step, even if it does fall significantly short of the amount actually needed. Banks need capital if they are to lend. And without vigorous growth in bank credit, the government might as well abandon its hopes of rapid economic growth over the next few years. The upcoming Basel III norms mean that Indian banks require upwards of ₹4.60 lakh crore of additional capital by 2018, of which the Centre’s share will be at least ₹2.4 lakh crore towards its holdings in nationalised banks. That would be three times what the government has infused over the past two decades in these banks. The government has so far not helped matters by dishing out capital in driblets, sometimes even less than the budgeted amount. Therefore, the move to infuse ₹25,000 crore this year and the next, and ₹10,000 crore in the two years after that, is a necessary first step and one essential to ensure that operations in these banks are kept going.

Providing financial support is one thing. But this is taxpayers’ money that is being allocated, and it behoves the government to also impose accountability on the banks for the money being infused. Given the strain on its fiscal resources, it is difficult for the Centre to periodically infuse capital into these banks. And one of the key reasons for the repeated need to infuse additional capital is the poor lending practices of state-owned banks which have sharply eroded their capital base. Bank balance sheets are under pressure, with stressed assets (non-performing assets or bad loans and restructured loans combined) for the banking system as a whole at nearly 11 per cent of total advances. Recent quarterly results are a grim reminder of the situation that banks find themselves in, with many of them reporting precipitous dips in profits, and non-performing assets and provisions for write-offs, ballooning.

It is time the Centre followed through on its promise of imposing stricter norms for allocation of limited government resources as capital to state-owned banks. It had stated earlier this year that only banks that meet certain minimum efficiency parameters (return on capital, return on equity, etc) would get funds. In light of this, the move to infuse as much as ₹10,000 crore out of the total ₹25,000 crore into banks that need the funds badly because they are financially weak, represents a retreat from the earlier tough stance. Apart from walking its talk on rewarding efficiency, the Centre will also have to ensure that the governance structure in state-owned banks is improved, while also ensuring that they are allowed greater autonomy in functioning. The banking system provides over half the resources for the commercial sector, and PSU banks account for nearly 75 per cent of this. The economy simply cannot afford the status quo to continue.

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