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  1. What is true fiscal cost of PSBs recapitalisation bonds? Rs 9000 cr in interest burden, says CEA Arvind Subramanian

What is true fiscal cost of PSBs recapitalisation bonds? Rs 9000 cr in interest burden, says CEA Arvind Subramanian

The true fiscal cost of issuing bonds worth Rs 1.35 lakh crore to infuse capital into public-sector banks saddled with bad loans is Rs 8,000-Rs 9,000 crore a year, chief economic adviser (CEA) Arvind Subramanian said on Wednesday, a day after the government announced a plan for massive recapitalisation of PSBs.

By: | New Delhi | Published: October 26, 2017 6:06 AM
fiscal cost of issuing bonds, fiscal cost of issuing bonds, CEA, PSBs, PSBs, Public-sector Asset Rehabilitation Agency, Economic Survey 2016-17,bad loans, PARA  Although the CEA didn’t explicitly talk about “stealth consolidation” in the banking space, favouring strong PSBs could ultimately lead to this and prevent loss of taxpayers’ money on banks that can’t perform in a competitive environment.

The true fiscal cost of issuing bonds worth Rs 1.35 lakh crore to infuse capital into public-sector banks saddled with bad loans is Rs 8,000-Rs 9,000 crore a year, chief economic adviser (CEA) Arvind Subramanian said on Wednesday, a day after the government announced a plan for massive recapitalisation of PSBs. But the costs “can be offset by the confidence impact of addressing the critical economic bottleneck, thereby increasing credit supply, private investment and growth”, he said. Speaking on future reforms to complement the latest move, he said some options worth exploring include selective and incentive-based recapitalisation, infusing capital while taking off stressed assets on banks’ balance sheets and “majority private sector participation” in banking.

“Since all banks must maintain a minimum capital adequacy, one possibility would be to recapitalise the unviable banks only to the extent necessary to finance their current balance sheet size while explicitly not providing for their growth,” he said in a lecture at a college here. Although the CEA didn’t explicitly talk about “stealth consolidation” in the banking space, favouring strong PSBs could ultimately lead to this and prevent loss of taxpayers’ money on banks that can’t perform in a competitive environment.  He suggested recapitalisation while taking off the stressed loans on banks’ balance sheet, as it will encourage private participation and help the bank management focus better on the critical task of finding good projects and increasing credit supply.

In fact, the Economic Survey 2016-17, under Subramanian, had made a case for a centralised PARA or Public-sector Asset Rehabilitation Agency that would purchase stressed loans (especially the largest and most difficult ones) from banks and then work them out either by converting debt to equity and selling the stakes in auctions or by granting debt reduction, depending on professional assessments. Once the loans are off the books, the government would recapitalise the PSBs, enabling them to make new loans. Similarly, once the financial viability of the over-indebted enterprises is restored, they will be able to consider new investments, according to the survey.

Making a case for a greater debate on higher private-sector participation in banking, Subramanian said on Wednesday that apart from the traditional argument that private ownership could result in less political interference in lending, it may have other benefits: “The freedom to recruit and retain personnel and procure from most efficient sources; avoiding the excessive caution in decision-making that often flows from a variety of constraints imposed by referee institutions, the so-called 4Cs”. “It is striking how much caution, inertia and, yes, even fear that public sector bank managers experience. That must be addressed,” he said.

He talked about the 4Rs — Recognition, Recapitalisation, Resolution, and Reform — to tide over the twin balance sheet problem of overleveraged companies and bad-loan-encumbered banks. Gross non-performing assets in PSBs rose from 5.43% of advances in March 2015 to 13.69% as of June 2017. Consequently, between FY15 and Q1FY18, provisioning of Rs 3,79,080 crore was made, much higher than that of only Rs 1,96,937 crore made during the preceding 10 years.

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  1. L
    Lal
    Oct 26, 2017 at 5:50 pm
    If loss making PSU are being put on the block, the same logic should apply to banks whose net worth is negative. Some or all of them may be bankrupt and only the public deposit is keeping them afloat. All such banks needs to be closed as it has become a regular drain on the tax paying public. The Govt. and banks are giving free gifts to rich corporates in the name of loans. When they refuse to pay, these are waived and written off. The corporates who have failed to repay the loan have other group companies operating in profit. The members of the families controlling these companies are rich and lead a lavish life. Just fleece the poor and the middle class and pay the rich. Reverse Robin-hood. Farmers are given loan and the loans of the rich farmers who pay no tax are waived regularly. The subsidies in place for fertilizer etc. only benefit the companies. PDS enriches the middlemen and the politicians. Nice system. Govt. should publish a document about this make in India.
    Reply
    1. V
      Vinitsharma
      Oct 26, 2017 at 10:22 am
      CEA has overlooked the spurt in market capitalisation and proposed divestment plans of some PSB. This is the right time for divestment and effective cost of recapitalization will be much lower.
      Reply

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