Column: Paving The Way For PSBs

The Union Budget was announced against the background of probably one of the most disappointing performances by the banking sector in the third quarter of this fiscal, with the public sector banks under pressure on account of growing NPAs. One of the outcomes of this discussion was that these banks need to be capitalised. Not just because of the regulatory requirement but also due to the declining net worth of some of them.

The government had already talked about providing Rs 25,000 crore as equity infusion in FY16, which was to be replicated in FY17. However, the market expected more, and the numbers spoken of were in the region of Rs 40,000 crore. Hence, it was not surprising that the market did not take kindly to the figure of Rs 25,000 crore, which led to bank stock prices declining.

The Budget does not actually disappoint as it has stuck to the roadmap that was laid down earlier and has also assured that it would be willing to provide more funds if required. It may be recollected that last year the Budget had less than Rs 8,000 crore in the initial allocations, but had put in more funds during the announcement of the supplementary Budget. Hence, it is evident that a deep dive analysis would be done when the March results are out and depending on the status of banks in terms of their net worth and NPAs, the allocation of funds would be done. One may be confident that the possibility of further deployment of funds would be considered in case it is necessary.

A more significant aspect of PSBs which has been mentioned in the Budget is the bankruptcy code and dispute resolution; these will help in better recoveries and exercise some control on the build-up of NPAs. Assuming this does proceed concurrently, the pressure on the government to recapitalise banks could get moderated.

While there has been a focus on capitalisation, which is integral to the resuscitation package for these banks, there are two other areas which could have been detailed in the Budget to provide not just future direction but also reassurance that the government is serious. This is important because the overall requirements of Rs 1.8 lakh crore would only partly be met by the government through the Budgets. The rest has to come from internal accruals and generation of fresh funds. For the latter, the house must be in order.

The first pertains to disinvestment of government stake in PSBs. It has, however, been mentioned that IDBI Bank would see government share coming down to less than 51 per cent, which will be the first of its kind. While the logistics has to be worked out with the bank being made strong before there is any sale made, this is indicative that the government is keen on going ahead with this experiment. As a corollary, the progress of the same will be closely monitored before replicating the same for other banks, with the target being 51 per cent to begin with before going down further.

The advantage here is that by going in for such disinvestment in PSBs, banks can be made self-sufficient with their own share sale being used to recapitalise them. This way the funding comes from within and can be linked directly with the stake sale, which will eschew putting pressure on the government’s fiscal health.

A similar thought was expressed on transferring the surpluses of the RBI to partly finance the capitalisation requirement of banks. Presently, these surpluses are transferred to the government account of ‘non-tax revenue’. A constructive debate could have been initiated on both these issues so that a solution could have finally been reached as the requirement is quite large. The roadmap drawn up earlier had spoken of both internal accruals and disinvestment being the way forward with limited support from the Budget. With Basel-III requiring additional capital, banks will be severally constrained and this move will help the system to get closer.

The second thought which could have been mooted for further discussion is bank mergers. The issue of merging weak banks with strong banks within the fold of PSBs is not new and has been debated earlier. However, given that we are looking to restructure this system with capitalisation by the government and selective disinvestment (at a later date), the merger possibility should have been explored. Also, it should be pointed out that several governance issues were addressed in the Indradhanush policy that was introduced last year to strengthen the organisational structures of PSBs.

Weak banks could be considered for merger with stronger ones, which will make the former better off, while the latter would gain size and take advantage of the acquired bank in terms of access to infrastructure and customers while addressing the issue of capital. This will also mean final restructuring of the structure of PSBs.

Alternatively, the idea of narrow banking could have been put on the table as this is a way of letting these banks get out of trouble with the government funding for capitalisation helping these banks until such time that the lending practices get streamlined.

The Budget hence, has steered clear of provocative debate and been more to the point in terms of focusing on the limited aspect of capitalisation without going beyond. As the issue is deep rooted, and these banks belong to the government, it would have been pragmatic to take a call on these other options as well.

The author is chief economist, CARE Ratings. Views are personal