Recapitalisation sans reform

Govt should focus on changing how PSBs are run

In what amounts to an admission that the Reserve Bank of India’s prompt corrective action (PCA) framework cannot at the moment be diluted, the government has sought approval from Parliament for supplementary grants worth Rs 410 billion that it will use to infuse additional capital into public sector banks (PSBs) with weak balance sheets. The government, which is concerned that the lending slowdown will affect investment and growth in the run-up to the Lok Sabha elections, is hoping some of these banks will be able to exit the PCA framework and resume lending. In the Union Budget for this fiscal year, Rs 650 billion had been set aside for the recapitalisation of banks, but it appears that this target will be comfortably exceeded this year. The Union finance ministry is of the opinion that the worst of the bad loans crisis is over, given that gross non-performing assets of PSBs have been declining since March this year. 

While the government is to be complimented on continuing to focus on reviving the ailing banking sector, it must acknowledge that many of its previous efforts have come to naught. For one, the ambitious Rs 2.11 trillion recapitalisation plan depended on banks being able to raise funds from the markets for recapitalisation bonds, an expectation that has not panned out exactly as hoped. If the Union finance ministry’s statement about peaking NPAs is taken at face value, then at least one of the four “R”s that determine the solution of the banking crisis has been properly addressed. But the others are still a work in process. The recognition of NPAs may have proceeded apace, but resolution, recapitalisation and reform are still hanging fire. The Insolvency and Bankruptcy Code, an important part of the resolution process, has been in force now for two years but the strict time-table for resolution — 180 days followed by a grace period of 90 days — is not being honoured sufficiently. This may be because of a shortage of capacity in the National Company Law Tribunal, among other institutions, and must be remedied without delay. 

It is now clear that recapitalisation is also running into trouble. But what is most worrying is that the fourth and most important R, reform, appears to be largely off the agenda. Various plans from the government, such as the “Indradhanush” reform scheme for public sector banks, have all fallen short mainly because they stop short of accepting the reality that state control over banking must decline if reform is to truly take hold. It may be difficult to privatise all PSBs at one fell swoop, given the state of their books and the lack of interest in the markets. But at least one or two might have been used as showpiece examples of privatisation that could have created an interest and confidence in the process. Sadly, there is little to show after more than four years of effort by the government in terms of reforms in the way that PSBs are governed or run. Without reform, further recapitalisation will be meaningless in the long run.