Dropping by at Pappu’s chai ka tela after his morning walk, Chotu found Motu hurriedly withdrawing many pink notes at the ATM.

Arrey bhai, he asked, itna cash? Plan to open a Swiss bank account?

This made Motu go beetroot red. Chotabhai, how can you joke about a serious matter? I am taking out my money so that another Nirav Modi doesn’t come along and transfer it to his Swiss bank account. Did you see PNB’s March results? They made a loss of ₹13,000 crore because of Nirav.

Yes, the PNB results aren’t great Motu, but there’s no need to panic. Shaant ho jao.

You can’t fool me, Chotu. If someone hops abroad with a ₹11,400 crore loan, the bank will have to show it as a loss, no?

No, no. You’ve got your facts, and accounting, all wrong. PNB didn’t even lend Nirav ₹11,400 crore, it only issued Letters of Undertaking.

An LOU is kind of guarantee issued by an Indian bank asking other foreign banks to lend to their customer. If the customer defaults, then the bank issuing the LOU has to pay others. That’s what PNB had to do after Nirav defaulted.

Don’t I help you get credit at Pappu’s chai shop? It’s like that.

Arrey, don’t compare me to fraud fellows! But don’t talk jargon, Chotabhai. The money is gone and PNB has to pay it.

That’s true, Motabhai, but understand two things. When a bank faces default, it need not write off the whole loss in one quarter, it can take time to do it. Also, PNB has a very large balance sheet and can easily afford to pay that money. In March 2018, PNB had ₹7.6 lakh crore of assets, with cash and bank balances of ₹95,000 crore, investments of ₹2 lakh crore and loans of ₹4.3 lakh crore.

But I am reading in the papers about sarkari banks not having enough capital. If they have so much money, why did the Government promise a ₹2.1 lakh crore rescue package? PNB also got money.

Oh, you are confusing capital adequacy with a bank’s liquidity position. Haven’t you heard of Basel III norms, Motu?

Now you are showing off Chotu. What does a bank depositor care about Basil or Coriander?

Haha, nice joke Motu, you seem to care a lot about eating though! See, after the financial crisis, global banking regulators met at your favourite spot, Switzerland, to tighten the capital rules for banks, so that they don’t fail. Under Basel III rules of RBI, Indian banks need minimum capital adequacy of 10.25 per cent. If a bank is short, its promoter has to bring in money. The Government is the owner of PSBs, so as bad loans eat into their capital, it is infusing capital.

Wah Chotu. Why should my tax money be wasted to follow some stupid rule!

Arrey, banks need capital to survive, just like you need khichdi-kadi every-day to go to work. Let me simplify. PNB’s capital adequacy ratio of 9.2 per cent means that for every ₹100 it has loaned, it has only ₹9.20 of its own capital. The rest is borrowed from depositors or others. But after providing for the losses on the Nirav fraud and other bad loans, PNB has net NPAs of 11.2 per cent. That means, for every ₹100 lent, ₹11.2 has already gone bad. This needs to be written off in future. So, unless the Government gives it enough capital, it cannot continue lending.

So, Chotabhai, what you are saying in a very complicated way is that losses may continue for some time.

They could, Motu, but be happy that these are Government-owned banks. The sarkar after all, has an unlimited supply of pink notes!

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