The government, it would appear, has finally come around to the view that PSU banks need a more aggressive recapitalisation plan than the Rs 70,000 crore it had initially envisaged under its Indradhanush scheme—according to Credit Suisse, PSU banks require around Rs 3 lakh crore of additional capital by FY19 to meet RBI norms on capital adequacy. While the government is believed to be planning to hike this fiscal’s infusion from the planned Rs 10,000 crore to Rs 25,000 crore, this is hardly likely to be enough. With this kind of infusion, PSU banks will have no option but to curtail their lending dramatically—while stealth privatisation may indeed be the government’s plan, it doesn’t help. For one, with consumers continuing to trust PSU banks to hold their deposits, the mismatch between rising deposits and contracting/stagnant lending will make the banks weaker. Two, while the government is in favour of banks merging, this does not lower their capital needs. Indeed, since there is no plan to allow massive retrenchment of labour and closing of branches, the merged entity is likely to be weaker than the independent ones. Also, with more loans before the NCLT for insolvency resolution, banks will also need to set aside much larger provisions than in the past.
In such a situation, a better bet will be to issue recapitalisation bonds for the full Rs 3 lakh crore and give the banks the required levels of capital—interest costs on these bonds will form part of the fiscal deficit. As and when banks are able to sell off non-core assets, the recapitalisation bonds can be retired. While certain banks have to be put up for privatisation, mergers must be considered only after there is a firm agreement on shedding workers and closing unviable bank branches. Weaker banks have to remain under RBI-style restrictions on expanding their balance sheets which include taking fresh deposits—in any case, the Rs3 lakh crore will mainly ensure they have the requisite level of capital adequacy and fund the expected losses over the next few years; the money is not going to be enough for these banks to start lending in any big way. The better banks will also find it easier to raise funds, and at better valuations, once they are adequately capitalised.