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Will Bank recapitalization spur growth and create jobs?

Author: Kingshuk Nag/Tuesday, October 31, 2017/Categories: Government, Banking & Financial Services, Expert View

Will Bank recapitalization spur growth and create jobs?

Last week finance minister Arun Jaitley announced a massive Rs 2.11 lakh crore bank recapitalization programme that is aimed at revitalizing the banking sector plagued with non- performing assets (NPA). This is the largest bail out ever for Indian banks by the government. As per latest estimates, NPAs of banks topped Rs 7.33 lakh crore in June 2017- up from Rs 2.75 lakh crore in March 2015. 18 PSU banks are part of the 20 top banks with highest NPAs. Bank stocks have jumped in the market after the announcement showing the positive response that the plan has elicited.

But the million dollar question is whether this massive infusion of banks will clean up the banking system and put them on the high road to efficient functioning? Although Jaitley announced that this massive infusion of funds will be accompanied by banking reforms, not many are convinced that this will change the way that public sector banks do their business.

Bank managers complain that the banks being under the administrative control of the government, an assorted group of netas and babus influence their decisions about granting loans. They say that conscientious banks managers are not able to take right decisions because they are shunted off to non- important positions or find their promotions halted if they do not fall to pressure. “Some time companies with strong connects are able to force us to give out loans for projects which are doubtful from the very beginning. Prime facie the loans seem to be doubtful. And later they turn out to be so. This is how NPAs mount. So long as this state of affairs cannot be rectified nothing will really change,” says a senior bank official who would rather not be identified. Some analysts think that the reforms in the banking system should be led by a process of privatization. The top banks are all government owned and a way to make them efficient is also to privatize them, these analysts aver. However mere privatization may not help- such a move must also be accompanied by improved corporate governance moves. Analysts say that without all this the bank recapitalization move might turn out to be a case of good money being thrown after bad money.   

As per the Jaitley announced package, government will directly buy bank shares worth Rs 18000 crore. Other than this, banks themselves will raise Rs 58,000 crore through the market. The remaining Rs 1.35 trillion will be through recapitalization bonds- how this will be administered is not clear; the government will finalize the plan over a couple of months. However it is expected that the government will first issue securities to banks and then in the second stage, the banks will sell these securities and thus will be beneficiaries of this.

The first bank recapitalization in recent years was in 1993 when then finance minister Manmohan Singh provided for Rs 5700 crore for them in the budget for 1993 in the form of bonds. Bad loans of banks had climbed to Rs 10000 crore in the aftermath of the financial crisis of the government in 1990-91 and Manmohan Singh infused cash to rev up the banks. Additionally it did not mean cash outgo for the cash strapped government. The government liability was restricted to interest payment on bonds and payment for them only on final redemption.

Even in the proposed recapitalization plan, the government liability will be restricted to the interest payment on bonds. Thus there will be limited impact on the fiscal deficit of the budget and thus on inflationary pressures. As per Chief Economic Advisor Arvind Subramanian this would mean an outgo of Rs 8000- 9000 crore annually which will not really affect budgetary deficit significantly.

RBI Governor Urijit Patel has pointed out that the Jaitley move is a ‘decisive package to restore the health of the Indian banking system and a monumental step to safeguard the country’s future.’ He also stressed that it was good that the move was being implemented at a time when the macro- economic indicators were positive. This would enable easier implementation of the scheme if the economy was under pressure – whether it was from inflation or deficit financing going out of hand.

Agencies like Goldman Sachs are optimistic that this recapitalization of banks will spur loans and growth in GDP resulting in boosting the stock market and also the rupee. Other analysts are optimistic that even after providing for their stressed assets, banks will have much more to lend. Incidentally 70% of all loans are through public sector banks who also account for 90% of all bad loans.

Interestingly the bank recapitalization move was unveiled by Finance Minister Arun Jaitley along with an ambitious plan for building 34,800 km of highways by 2021-22. Named the Bharatmala Pariyojana, the scheme proposes a spending of Rs 5.35 lakh crores. Part of this highway construction plan – that will spur economic activity and creation of jobs- will be funded by private investment. Government will finance this scheme in a big way through the collection of central road tolls. But the point to note is that banks after their recapitalization will be in a good position to fund new projects. Thus it is not merely coincidental that the finance minister (after Cabinet approval) announced both the schemes together.  If both the plans are implemented well, they promise the prospect of impacting positively on the economy.

(Kingshuk Nag is the author of several best-selling non-fiction books and former Resident Editor of Times of India)

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Kingshuk Nag
Kingshuk Nag

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