Will bank recapitalisation fix NPAs?

Will bank recapitalisation fix NPAs?

Centre plan to infuse ₹2.11 lakh crore capital over the next two years into public sector banks. 1.35 lakh cr. will be through sale of recapitalization of bonds. This sum of money equivalent to 1.25% of GDP. Indiscriminate lending earlier by banks may be the main reason for high level of NPAs. The government’s capitalisation package for public sector banks will provide a strong booster dose of relief for the capital-starved PSB’s.

What are the causes of deceleration in credit growth?

1.     Poor Demand

Some observers that the deceleration in credit growth to poor demand. They say that corporates have excessive debt and are in no position to finance any investment.

2.     Supply of Credit

·        PSBs, unlike their private sector counterparts, had lent heavily to infrastructure and other related sectors of the economy. Following the global financial crisis of 2007, sectors to which PSBs were exposed came to be impacted in ways that could not have been entirely foreseen.

·        The failure to quickly recapitalise PSBs has adversely impacted the economy. Corporates are stuck with high levels of debt and are unable to make fresh investments. It has hindered the effective resolution of the NPA problem and kept major projects from going through to completion.

Why did government take the route of recapitalizing PSBs?

§  If banks do not have adequate capital, they cannot lend. This would dampen the economy.

§  Enhancing the flow of credit is critical for revitalizing India’s growth momentum at a time when the global economy is recovering.

§  Private investments remain elusive in the face of the “twin-balance sheet problem.

§  The recovery process set up through the Insolvency and Bankruptcy Code (IBC) reform had not been working at the desired pace.

§  Bank’s capital adequacy ratio (CAR) has become adverse.

What is the source of funds for Recapitalization by government?

§  Of the ₹2.11 trillion package, ₹1.35 trillion will be towards the issue of recapitalization bonds. PSBs will subscribe to these bonds. The government will plow back the funds into banks as equity.

§  Another ₹180 billion will be provided as budgetary support.

§  The remaining ₹580 billion will be raised from the market.

Analysts believe the package should enable banks to provide adequately for NPAs and support modest loan growth

Criticism on Recapitalization

§  This measure is not going to result in the recovery of bad loans.

§  It is a very temporary solution and only treats symptoms and not what causes these symptoms.

§  The proposed recapitalization bonds are likely to add to the fiscal deficit.

§  It is inefficient and incompetent, if banks would have recovered these loans, their interest revenue would have been more; and they would have generated capital internally out of the profit.

§  The IBC (Insolvency and Bankruptcy Code) is only a ploy to extend favors to big corporates to escape from their liability at the cost of the public exchequer.

Other measures to revive bank credit:

1.     Tenure and remuneration of senior management:

·        For improving governance of PSBs, questions like the tenure of senior management have to be addressed. Public Sector Bank chiefs and their managing/executive directors must have a fixed tenure of at least five years. Political and economic influence on senior management decisions should be avoided.

2.     Adopt best practices

·        Accountability needs to be fixed by removing senior management for non-performance. Create a framework for funding of projects to be undertaken by one bank which down sells it within a period of 90 days.

3.     Fill the gaps in regulatory framework

·        . Borrowers borrow from one bank and go to another and borrow money. Banks do not talk to each other. Also, there are issues in getting loans approved for large projects. Borrowers have to run to 20 banks to get a sanction, which is uneconomical, costly and leads to corrupt practices as bank officials seek favors to agree to a proposal.

4.     Appointment of Statutory auditors

·        In case of wrong reporting, these have to be punished by prohibiting them to audit any financial entity regulated by the RBI, the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority and the Pension Fund Regulatory and Development Authority.

5.     Needed one quick action plan

·        We need to pick NPAs from PSBs of each sector, park them in one place by creating an entity like a SUUTI (specified undertaking of the Unit Trust of India), fund the banks and invite international and national investors to dispose of the assets.

·        The system will have to conduct more analysis, more evaluation sector-wise in terms of its potential for value restoration and enhancement

Conclusion

In the last three years, banks have written off ₹1,88,287 crores. We have to bear in mind that when banks lose money or when the government recapitalizes PSBs, it is all people’s money should have spent for people’s welfare, not to fund corporate defaulter’s or to recapitalize the banks to adjust these bad loans. The government could make a huge profit by selling this equity after improving the management of PSBs. Recapitalisation could give the banking system a good breathing time to enhance its credit portfolio and restore value out of the NPA accounts