Bank recapitalisation: Too late, too little

Boxed into a corner by the slowdown in the economy, coupled with mounting NPAs and falling private investments, the Finance Minister on Tuesday announced the desperate move of recapitalising the public sector banks. However, the move which is worth Rs 2.11 lakh crore is too late, too little. The NPAs have skyrocketed from Rs 36,000 crore in March 2014 to Rs 8.35 lakh crore in June 2017. Had the recapitalisation plan been set in motion three years ago, it would have proved to less expensive. The capital infusion is roughly half of what the banks actually need to fill the bad loan void and to meet new regulatory requirements. Fitch Ratings estimates that $65 billion is needed by the banks to meet international regulatory rules. That comes to about 4.2 lakh crore, more than twice the capital infusion of 2.1 lakh crore announced by the Finance Minister.

Though the move is being touted as “big and bold” by the government, it has turned out to be a damp squib that will impress neither the Indian industry nor the common man, said Congress leader Randeep Surjewala. Among other things, the government said that it will issue “bank recapitalisation bonds” for Rs. 1.35 lakh crore, which it said, will be used to buy more shares in PSBs. Not only is this vaguely worded, the announcement gives no indication of when and how the government will issue these bonds. Neither do we know when the money will reach the banks. Also, the government is yet to come out with a roadmap of targeted beneficiaries such as MSMEs and the stressed agrarian sector. Further, the move will also inflate the fiscal deficit of India, which had already reached 96% of the yearly target in August itself. Borrowing money (Rs 1.35 lakh crore bonds plus part of Rs 76,000 crore from the market) to recapitalise banks would obviously mean breaching the fiscal deficit target.

The Narendra Modi government needs to acknowledge that it is too late in addressing the problem. The recapitalisation move is, in essence, a half-hearted measure to try fixing a much larger issue.