Reality of recapitalisation

Be that as it may, the mammoth 2.11 lakh crore (2.1 trillion) rupees recapitalisation package announced on October 24 by Union Minister of Finance & Corporate Affairs, Arun Jaitley, has been broadly welcomed by investment rating agency Moody's as, "a significant credit positive for Indian PSBs"; with some economists and policy wonks praising it as the much-needed booster dose to free the credit sluice that had been blocked by the burden of NPAs for far too long. Of the aggregate 2.1 trillion rupees additional infusion of capital, 1.35 trillion rupees would be in the form of recapitalisation bonds, while the balance would entail a medley of already declared budgetary prop and capital raisings by the banks themselves from the capital markets with their marked warts and more.

Despite their proclivity to "extend and pretend" the credit disbursal culture, it is not for the first time that the PSBs have been so massively and comprehensively bailed out, as in the latest instance, as they had been mollycoddled similarly since the advent of the economic liberalisation way back in the 1990s. Both the incumbent and the erstwhile UPA governments had resorted to safeguarding the wobbly pillar of the financial system manifest in the PSBs without demanding any clear commitment by the way of quid pro quo, to subject them to rigorous cost control and other prudential lending behaviour so that the eruption of egregious errors post-advances does not haunt them. But then the inter-linked nexus between the political classes and the banking biggies is adamantine.

It was only in July this year that a report of the Comptroller and Auditor General of India (CAG) on recapitalisation of PSBs, presented in the Parliament skimpily covered by the mainstream media, laid bare the shortcomings and glaring gaps in this exercise, spread over a nine-year span from 2008-09 to 2016-17. It is revealing to grasp the granular details of the audit's gruelling exercise in freeing fact from fiction or the fictitious promises that such a move generates. Thus, a cursory perusal of this report shows that over 2008-2016, the advances of PSBs had more than doubled from Rs 22,59,212 crore to Rs 55,93,577 crore, though the rate of increase in advances had plummeted from 19.56 per cent in 2009-10 to a nadir of 2.14 per cent in 2015-16. The return on assets (RoA) of PSBs, a barometer of their profitability, has been consistently lower than that of scheduled commercial banks (2011-2016). PSBs accounted for well-nigh 88 per cent of gross non-performing assets (GNPAs) of the banking industry in 2015-16, it said, adding that there is, "a significant gap between the book value and the market value of PSB shares, with most PSBs having a lower market value, which may come in the way of PSBs approaching the market for additional capital funds". This is a salient point of the audit, as in the latest bailout package the PSBs are supposed to raise as much as Rs 58,000 crore from the market, probably by availing the leg room provided to dilute the government's equity that hovers well over 51 per cent. But this is easier said than done, given the glitz and glamour that the PSBs need to put on before they parade into the capital markets' beauty contest to lure potential subscribers to grab their equity!

The CAG audit pointed out that the Government of India infused Rs 1,18,724 crore in PSBs during 2008-09 to 2016-17 but for the second phase of fund infusion in fiscal 2010-11, Rs 6,423 crore was infused in PSBs, mainly on the basis of information obtained from the PSBs sans any independent verification by the Department of Financial Services (DFS). The audit further admitted that it could not verify the assessments about capital requirements in PSBs made by DFS as they were in line with INAAP and AFI reports of the banks. The audit also detected that the basis for working out parameters for capital infusion altered between actual and estimated values from year to year and often within different tranches in the same year!

Even in last fiscal 2016-17, DFS resolved that 25 per cent of the capital to be infused in 2016-17 would be disbursed upfront and the remainder would be latched on to the achievement of the quantitative targets by PSBs. But this decision was revoked in July 2016 and eventually with most of the PSBs falling woefully short of the set target, performance was not deemed as the basis for capital infusion in 2016-17. This dilution in norms is alarming as it let the bank management off the hook to carry on with their chores, as if, no harm would come as the long arm of the law is not all that looks minatory in practice!

Yet another glaring incapacity revealed in the CAG report is that against a target under Indradhanush for raising capital from the market by PSBs of the order of Rs 1,10,000 crore between 2015-16 and 2018-19; in the span of January 2015 to end-March 2017, they were able to raise only Rs 7,726 crore.

Pointing out that high levels of NPAs in banks impairs the economy as bank credit is a catalyst for economic growth, the CAG stated that GNPAs of PSBs zoomed from Rs 2.77 lakh crore (March 31, 2014) to Rs 6.83 lakh crore (provisional), as on March 31, 2017. What is bothersome is that, for the PSBs, the recovery rate has in general been at a snail's pace compared to the write-off between 2010-11 and 2014-15, showing that the system is unable to deploy carrot and sticks even in uneven proportion to wrest what it could from the wreckage!

The only salutary feature in the latest package, given the backdrop of the stark reality portrayed by no less a body than the CAG, is the assurance by Jaitley that reforms would be rolled out to ensure that the whole plan of recapitalisation is reinforced at every stage so that the shareholders and the stakeholders in the system can breathe easy!