'Govt can sell some firms to recapitalise banks'

In order to strengthen public sector banks (PSBs), government could sell off some PSUs and use the proceeds to make additional investments in state-owned lenders, the Economic Survey said today.
The government could sell off assets that it no longer wants to hold, such as certain nonfinancial companies, and use the proceeds to make additional investments in the PSBs, said the economic report card of 2015-16, tabled in Parliament by Finance Minister Arun Jaitley.
"This option is reasonably well understood. What is less appreciated is that RBI could do the same. That is to say it could redeploy its capital as well," it said.

Last year, the government had announced a revamp plan 'Indradhanush' to infuse Rs 70,000 crore in state-owned banks over four years, while they will have to raise a further Rs 1.1 lakh crore from the markets to meet their capital requirements in line with global banking risk norms Basel III.
As per the blueprint, PSU banks will get Rs 25,000 crore this fiscal and also in the next fiscal. Besides, Rs 10,000 crore each would be infused in 2017-18 and 2018-19.
Referring to the problems in twin balance sheets (TBS) - PSBs and corporate - the Survey said it is one of the most critical short-term challenges confronting the Indian economy.

There is a problem of the "impaired financial positions of the PSBs and some large corporate houses - what we have hitherto characterised as the 'Balance Sheet Syndrome with Indian characteristics'."

It is clear that the TBS problem is the major impediment to private investment, and thereby to a full-fledged economic recovery, it said.
"The problems in the banking system have been growing for some time. Stressed assets (nonperforming loans plus restructured assets) have been rising ever since 2010, impinging on capital positions, even as the strictures of Basel III loom ever closer on the horizon," it said.
Banks have responded by limiting the flow of credit to the real economy so as to conserve capital, while investors have responded by pushing down bank valuations, especially over the past year.

"Resolving the TBS challenge comprehensively would require 4 Rs: Recognition, Recapitalization, Resolution, and Reform," it said.
"Banks must value their assets as far as possible close to true value (recognition) as the RBI has been emphasizing; once they do so, their capital position must be safeguarded via infusions of equity (recapitalisation) as the banks have been demanding; the underlying stressed assets in the corporate sector must be sold or rehabilitated (resolution) as the government has been desiring; and future incentives for the private sector...," it said
On the four steps to clean up balance sheets, the Survey
said: "There is a needed sequence to these 4 Rs: Recognition must come first, but it must be accompanied by an adequate supply of resources; otherwise, banks will be vulnerable."

Highlighting balance sheet vulnerability of PSBs, it observed that in some ways it mirrors similar frailties in the corporate sector, especially the large business houses, that borrowed heavily during the boom years to invest in infrastructure and commodity-related businesses such as steel.
Corporate profits are low while debts are rising, forcing firms to cut investment to preserve cash flow, it said.
"Some steps have already been taken. In August last year, the government launched the Indradhanush scheme, which includes a phased program for bank recapitalisation," it said.
Meanwhile, the RBI initiated the 5:25 and Strategic Debt Restructuring (SDR) schemes, which create incentives for the banks to come together with their borrowers to rehabilitate stressed assets, it said.

"These are good initial steps which might require follow-up," it noted.