The government’s latest announcement on capital infusion into banks suggests it is attempting to boost loan growth by empowering weaker lenders. As opposed to a well-defined distribution of resources in the last few rounds when the capital allocation was based purely on financial metrics such as the return on assets or profitability, this time around the government appears to be eager to capitalise weak lenders. Ahead of the general elections next year the government is concerned there could be a shortage of liquidity in the system, choking the flow of credit to the corporate sector, especially smaller enterprises.
The apprehension stems from the fact that NBFCs and HFCs aren’t able to lend as much as they were earlier because they aren’t able to access adequate long-term funds at the right costs. The loan growth at these intermediaries has been exceptionally strong over the last three or four years as they were able to source short-term borrowings at cheap rates. That is no longer possible. However, pumping capital into weaker banks, especially those that were operating under the prompt corrective action (PCA) plan, may not be the right way to go about it. The problem is that even after the clean-up at these banks, many of them continue to post large losses—IDBI Bank for instance. It is apparent that lending processes at these lenders are not up to the mark and therefore, at this stage, it is better to let these banks recover fully else there could be a re-lapse.
Indeed, the government has been eager to dilute the PCA framework by reducing the number of filters that trigger action. Rather than three metrics—capital, NPAs and profits—it wants only capital to be considered. That could have deleterious consequences for the system since these lenders are financially fragile. Post the Q2FY19 results, a few more might find themselves with financials that call for PCA to be initiated. The government would be frittering away precious resources by capitalising these lenders—it should let RBI initiate action. A bailout by the government each time—by using taxpayer money—is a bad way to deal with these casualties. While the government no doubt wants to pander to the middle class since elections are round the corner, that cannot be the answer. The capital must go to the stronger banks to make them stronger. Over time, the weaker lenders can be amalgamated with them or sold off to private sector buyers. The PCA was a good step taken by RBI; the balance sheets of the banks concerned were found to be so weak post the AQR—asset quality review—initiated by RBI in Q4FY16, they would surely have become insolvent had the necessary steps not been taken. The government should not undermine this move.
As Viral Acharya, deputy governor RBI, has rightly pointed out, had these banks not been re-capitalised they might have been unstable and jeopardised the rest of the banking system. Within PCA banks, almost half of the total infusion—of `63,500 crore has taken place during 2017-18 and 2018-19. Given how the lending practices of these banks was poor—else they would not have been in the mess they were—it was imperative their operations were curtailed for sometime till their balance sheets stopped haemorrhaging. In fact, as Acharya found, despite being more poorly capitalised and at a higher stressed assets ratio than other lenders, PCA lenders were actually growing their loan books at a pace that was similar to others until 2014.