Recapitalisation will be a big relief for PSBs, but real thing is the promise of sweeping banking reforms
While the big bang Rs 6.9 lakh crore project to build 83,677 km of roads across the country over five years will give a near moribund economy the kick-start it needs—and a big boost in productivity once the major stretches are completed—the government’s plan to recapitalise PSU banks is the reform everyone has been waiting for. PSU banks have been short of capital thanks to the huge provisions needed for loan losses—between March 2015 and June 2017, NPAs rose by Rs 4.6 lakh crore—and the Rs 2.1 lakh crore capital infusion plan will go a long way in beefing up their balance sheets and also make them more attractive to equity investors. This is critical since, while Rs 1.3 lakh crore will come from recapitalisation bonds, the rest will come from a combination of budget support and the banks themselves raising funds. There is no clarity on how the bonds are to be structured—one possibility is that banks themselves could subscribe to the bonds. It is not clear how markets will react to this—by some definitions, these are considered below-the-line items—but the interest will have to be funded through the budget.
More than the capital, finance minister Arun Jaitley’s comment that the infusion would be accompanied by ‘reforms’ is key. The government has talked of consolidation and has been pursuing it somewhat stealthily by allocating capital only for the relatively stronger banks. Tuesday’s announcement, which talked of “differentiated” funds-allocation suggests stronger banks are likely to be favoured. This is critical, else the capital infusion will set off another wave of bad lending. If the consolidation is accompanied by lowering the government stake to below 51% in some banks, that would be a really big move. Given how state-owned banks are in poor shape and fast losing market share in an increasingly digital environment, holding on to them makes little sense anyway. Though it is hard to see investors/buyers for PSU banks at this stage since most of the smaller lenders are weighed down by loan losses and large unproductive work forces, investor perceptions would change if government ownership levels were to fall. Though a bad bank seems to be off the table for now, it may not be a bad idea to think of some way to warehouse the NPAs, leaving banks to operate with clean balance-sheets.
What’s evident from Tuesday’s announcement is that the government has a clear game-plan. Given how the twin balance-sheet problem has been hobbling the economy for several years now, it is critical the government continues to invest since private sector capex isn’t expected to rise meaningfully for a few more years. The planned infra-spend will create lots of jobs, but will also result in more reforms. Funding them, as well as the ambitious PM Awaas Yojana, for instance, will not be possible till there is aggressive lowering of government stakes in all PSUs and also large privatisation. Similarly, though the 20-odd kilometres per day of road construction is a big step up from the UPA days, the plan is to more than double this; that is not possible unless there are plans to restart genuine PPP investment. In other words, the crisis in growth could be the spur to big reforms.