Capital boost to PSBs: Incentivising non-performers

Laymen of the country were at a loss to understand the recent decision of the Central government to infuse Rs 2.11. lakh crore as capital fund through recapitalisation bonds. They are really perplexed between the comments of the bankers and cartoons of the press persons.

While the former had a high praise for the decision as it is deemed a pre-requisite for stable economic growth and restoring the health of the banking system, in contrast, the sarcastic cartoonists believe it only replenishes the coffins of the unscrupulous, dishonest, vagabond industrialists.

After all, the poor and uneducated cannot understand the complex and sophisticated theoretical underpinnings, much less the talk of Moody’s and S&P. They are plain people who only have the limited understanding of comparing a hapless farmer and wealthy industrialist, who could avail of the benefit of debt restructuring and are able to draw the financial system towards an unending litigation.

The moot question, in this context, is whether there is any rationale behind the decision of the Central government on stuffing the already languishing PSBs having huge non-performing assets (NPAs) or whether it leads to incentivising the non-performers as another dole to help lenders to stay afloat.

As a matter of fact, the Central government is trying to repeat the case of 1993 which happened almost two-and-a-half-decades ago. Going into the history, it was the most turbulent times for the economy during the 1991-92 when the growth rate had turned negative, there was a crisis in the Balance of Payments position and our forex reserves dipped so low that they were not adequate even to support three weeks imports.

Hence, a slew of measures were imagined, thus leading to the First Phase of Economic Reforms in the country. Again it was Dr Manmohan Singh, the then Finance Minister who provided a modest amount of just Rs 5,700 crore in his 1993 Budget to strengthen the capital base of the PSBs.

Then also, it was stated that the infusion would be in the form of issue of bonds implying no cash outgo from the exchequer but only the commitment on the interest payment. In spite of all this, there was no much issue of NPAs nor the banking system was so saddened at that time by the restructuring.

The banking system evolved over the years. The deposits have grown, the lending has steeped, and the crisis also deepened. The irony of the situation is that similar measure was resorted to in 1993 to bail out the economy. But now the economy is claimed to be shining, growth rates are zooming at 7.1 to 7.6 per cent, and time has become ripe to hasten the process of reforms leading into fourth or fifth phase.

Thus, where is the need to call any agency for help or stabilisation? May be, it is to cover up the lackluster performance of the banking sector. The system fails of its own volition and because of injudicious and callous business decision-making, yet expects a recipe from the government and it is conceded. It is for this reason, Dr Singh at that time also exhorted banks to ensure that their management practices were so prudent that they would ensure high-level of portfolio quality.

But the huge NPAs of banks speak of the beleaguered quality of the banking assets. As per one estimate, the gross NPAs of the banks are around Rs 8 lakh crore and together with restructured loans, they are estimated to be about Rs 15 lakh crore.

As per the recent (August 17, 2017) report of the CARE, a credit rating agency, 18 out of top 20 banks are PSBs having the highest gross NPA ratios. Individually, the GNPA ratio of IDBI is 24.11 per cent and that of IOB is 23.6 per cent and of SBI 22.7 per cent. It is only in case of Indian
Bank, the GNPA ratio is the lowest at 7.21 per cent.

In terms of absolute amounts, the total was pegged at Rs 8,29,338crore (by the end of June 2017) and that of SBI alone at Rs 1,88,068 crore. Under these circumstances, it is feared that all this money goes towards provisioning for bad loans amounting to replay of the same scene. Without setting right the things at the grassroots level, there may not be any solution to the problem.

The government and the RBI have been suggesting to the banks to take stern action on the unscrupulous borrowers or face ‘hair cut’ in the form of write-off of bad loans. There was even a suggestion to set up a ‘Bad Bank’ to address the issue. Unless properly monitored and cared for, it will turn out to be a next ‘hair cut’ for the people only. (Writer is Former Vice-Chancellor, Acharya Nagarjuna University)

By Prof K Viyyanna Rao