Recapitalization or capital infusion of Public Sector Banks from budgetary allocations has been making news for the past few years on a regular basis. In August 2015, the government under its Indradhanush framework announced that Public Sector Banks would be provided Rs 70,000 crores from budgetary allocations spread over four years between FY 2015-16 and FY 2018-19. By December 2017, Finance Ministry intimated that they had so far infused Rs 51,858 crores in Public Sector Banks under the Indradhanush plan. The step towards recapitalization has been taken basically to bail-out the banks from the NPA crisis, where most of the Public Sector Banks have been unable to keep a check on it, along with ensuring that Public Sector Banks adequately meet the Basel III norms by March 2019. With stressing further the need of recapitalization, the government came up with a mega-plan of recapitalization of Public Sector Banks in October last year, which sent the stock markets soaring. The government had announced a recapitalization plan of Rs 2.11 lakh crores where it would infuse Rs 18,000 crores from the budget, Rs 58,000 crores would be raised by the banks by selling shares and Rs 1.35 lakh crores would be raised through Recapitalization Bonds. Even though the government is coming up with different instruments for implementing its recapitalization plan, the matter of concern is that public money is being used to meet these ends. Even the interest payments for the Recapitalization Bonds would have to be paid through budgetary allocations. Taking the step forward in implementing its plan, the government announced on January 24 this year that government would infuse Rs 88,139 crores in Public Sector Banks where Rs 8,139 crores would be direct infusion from budgetary allocations and Rs 88,000 from Recapitalization Bonds.
While this may sound like a much-needed step from the government towards providing some relief to the ailing Public Sector Banks deeply saddled by the NPA crisis, the citizens should ask the question as why the government is not prioritizing improving the recovery of NPAs than resorting to recapitalization from budgetary allocations adding further strain on the fiscal deficit. While a slew of measures had been announced over the last couple of years to address the NPA woes of Public Sector Banks, but no concrete steps have been taken to recover the loans from the defaulters. With the government being the promoter of Public Sector Banks, the onus lies on the government to take firm actions for addressing any crisis faced by these banks. However, the responsibility of the government should not kick-in only at the time of the crisis, but a larger question looms that whether there is enough monitoring of Public Sector Banks by the government and the RBI, especially in cases of loans extended to corporate accounts. There have also been various instances of political interference in extending loans favouring the corporate borrowers. According to RBI, by end of September 2017, NPAs of Public Sector Banks had reached a mammoth figure of Rs 7.34 lakh crores and 77 percent of these NPAs belong to corporate accounts. The NPA figures of Rs 7.34 lakh crores should be seen in the context of our budgetary spending on key social sectors such as education and health. Given below is a glimpse of Union Government’s budgetary allocation to some of the key sectors for 2018-19, which can be compared with the Gross NPA figures:
|Education||~~ Rs 85,000 crores|
|Health||~~ Rs 54,600 crores|
|NREGA||~~ Rs 55,000 crores|
|Women and Child Development||~~ Rs 24,700 crores|
|Agriculture and Farmers Welfare||~~ Rs 57,600 crores|
|Rural Development||~~ Rs 1,15,00 crores|
|Allocations under Tribal Sub Plan||~~ Rs 39,100 crores|
|Allocations under Scheduled Castes Sub Plan||~~ Rs 56,600 crores|
(Source: Union Budget Full Speech 2018-19 – http://www.indiabudget.gov.in/ub2018-19/bs/bs.pdf)
Even though the government, the RBI and the banks have blamed the external economic conditions as one of the key reasons for the humongous rise in the NPAs of Indian banks, the scrutiny on the day-to-day functioning of the banks goes unnoticed. Banks are custodians of depositors’ money and they carry huge responsibilities in taking financially sound decisions while extending the loans to their borrowers. Doling out easy loans to companies with poor balance sheets and then blaming the external economic condition as the guise for lack of due diligence does not sound like responsible banking. If the bankers at Public Sector Banks admit that they are bowing under the pressure of cronyism to extend loans under the pressure from the government then it is a serious case of moral hazard. On the other hand, if banks claim that they are exercising absolute due diligence before extending the loans to the corporates and despite that, the loans are turning into NPAs, then this raises stark questions on the ability of the bankers to safeguard the depositors’ hard-earned money.
One is not arguing that government should not pitch in for rescuing the banks when they are hit by a crisis. It is government’s duty to do that, especially as healthy functioning of Public Sector Banks is crucial for the stability of Indian economy, which showed its resilience during the 2008 global economic recession. However, as the old saying goes that prevention is better than cure and government should also find ways to stem the NPA crisis from its origin, i.e. addressing the poor lending practices of the banks. This should be clubbed with the government showing the political will to recover loans and taking punitive actions against the defaulters. A frequent use of the bank recapitalization tool sends the signal to the borrowers that they have a free hand in taking huge value loans from the Public Sector Banks and that later on, they can default on their loans without any severe penalties.
In order to reduce the need for recapitalization, in the long run, Public Sector Banks should be strengthened. The need of the hour is to bring transparency policies in the functioning of the Public Sector Banks, especially as they are public institutions. There should be Due Diligence and Social & Environmental Safeguards policies in place, which the public can use to monitor the large-scale lending by Public Sector Banks in high-risk sectors. A large number of NPAs of corporate accounts have arisen primarily because lending by Public Sector Banks has escaped any scrutiny of the public. Moreover, there should be clearly defined accountability to fix responsibilities of bank officials if their poor decision-making leads to large-scale NPAs. The decision-making of Public Sector banks should also be free from any political interference in lending to corporations having close ties with the regime in power. Privatizing the banks cannot be a panacea for addressing the NPA crisis or obviating the need for recapitalization. Privatizing the Public Sector Banks is something which India economy cannot afford as still a large section of the population is under-banked and financially excluded, especially in rural areas. The budgetary allocations made for recapitalization comes from the taxpayers’ money, which should instead be used for strengthening our spending on the social sector such as education, healthcare or rural employment. If the government takes some of the steps suggested above then the need for recapitalization would be lessened and we would have more robust Public Sector Banks.
 For Some Years, Banks Are Facing Challenging Time But No Cause Of Panic – Press Information Bureau – August 14, 2015 – http://pib.nic.in/newsite/PrintRelease.aspx?relid=126074
 Nearly Rs. 52,000 crore capital infused in PSBs under Indra Dhanush plan – Press Information Bureau – December 20, 2017 – http://pib.nic.in/newsite/PrintRelease.aspx?relid=174573
 – Govt announces mega Rs 2.11 lakh crore bank recapitalisation and Rs 7 lakh crore road plan – The Economic Times – October 25, 2017 – https://economictimes.indiatimes.com/industry/banking/finance/modi-govt-announces-mega-rs-2-lakh-11-thousand-crore-bank-recapitalisation-and-rs-7-lakh-crore-road-plan/articleshow/61202075.cms
 – Govt kicks off banking reforms, to infuse Rs88,000 crore in PSU banks by March – Livemint – January 24, 2018 – http://www.livemint.com/Industry/3HbxxnbDhmB4P1g83OBXII/Govt-to-infuse-over-Rs8800-crore-in-20-PSU-banks-as-part-of.html
 Lok Sabha Unstarred Question No: 1291, Answered on: 22.12.2017 – http://184.108.40.206/Loksabha/Questions/QResult15.aspx?qref=59322&lsno=16
At the risk of repeating, the article paints a picture with just ‘a’ stroke to Basel 3. When a loan goes default, banks would be liable to depositors, which is cushioned for through provisions either from profit or capital in order to see to it that that liquidity is available to every depositor as per terms of deposit. The RBI mandates rules in reference to banks capital requirements, when the mandated capital goes below the threshold, banks are asked to raise Tier 1 capital. In the case of PSBs, the Government of India happens to be the primary promoter invested with the responsibility of infusing requisite capital keeping in mind implementation of Basel 3 norms. So, how would recapitalization change scenarios? With this process, capital ratios of banks would increase implying that banks would be in a position to raise more capital, and thus increasing lending subsequently. The uptick is that credit increases. The contrarian’s position is for some leeway for losses to exist. Effectively, what the government wants to do is through recapitalization is forcing banks to take losses by pushing NPAs to real losses, and while that is being done, the government replenishes the capital that is lost. So, in theory, recapitalization might actually solve, or rather more moderately resolve the NPA crisis, while in practice, one would see a surge in NPAs as more of them are getting under the scanner due to the push either by the Government or the RBI. Analogically, it is like either homeopathy, where vaccination initially aggravates the symptoms before beginning to start nipping the bud of what caused it in the first place. But, since I said analogically, homeopathy is also now considered a pseudo-medicine, and thats where recap and NPAs would be least synergetic.
I really don’t think enhancing transparency is going to adversely impact the quantum of lending.