That the UPA left behind a decrepit, decelerating economy was something even the blind could see; but hubris and over-confidence in the idea of NaMo as the panacea for all UPA ills has prevented the NDA from realising how deep the rot had gone. That’s why, despite the beneficial impact of cheap oil prices, which helped rein in both inflation and the fiscal deficit, the economy is still thrashing about in shallow, muddy waters instead of heading for the high seas.
In the first half of February, the last of the major torpedoes crashed into the hull, as bank after public sector bank reported huge losses. At the time of writing, some 25 public sector banks had reported losses of more than Rs 10,700 crore in just the October-December 2015 quarter, with the promise of more to come in the last quarter of 2015-16. Gross public sector bad loans — or non-performing assets (NPAs) that have been officially recognised as such — are in excess of Rs 3 lakh crore, and even this may be an understatement.
Most of the remedies being suggested won’t work. For example, one short-term answer is to let the fiscal deficit bloat and recapitalise banks so that they can start lending again after writing off their unrecoverable loans. This can be done, but it will only kick the can down the road unless more solid measures are taken. It will let bankers who made crony loans and the cronies who swallowed them off the hook.
The second solution suggested, that banks can raise more capital from the markets, is also a non-starter when stock prices are so low. If capital is raised at such low prices, it will be about selling taxpayer assets in a firesale. The political cost is simply too high.
The third solution — privatisation — is again DOA —dead on arrival. For two reasons: First, privatisation of banks is not an option as long as the bank nationalisation laws are not amended, and this seems unlikely when the NDA has no chance of getting such legislation through the Rajya Sabha.
But even if the legislation passes through a miracle, why would any private banker want to buy rotten apples? You may get the occasional promoter willing to buy a bad bank for Re 1, but not a serious player. Take Dena Bank, whose market value is around Rs 1,800 crore. A controlling stake in the bank can theoretically be had for less than Rs 1,000 crore, but anyone who buys it will have to invest at least another Rs 1,000-2,000 crore over the next year or two to write off more bad loans and start investing in new technology, voluntary retirement schemes, etc. No one will buy Dena Bank without the will to invest at least Rs 4,000-5,000 crore, and there are simply too few of those kinds of businessmen in India right now.
With far lesser money — Rs 500 crore or less — one can start a new payments bank or even a small bank, the two new categories created by the Reserve Bank last year.
The only logical way out for the government is to revive these banks in the public sector by inducting good bankers at the top, giving them autonomy, helping them recapitalise in the short-run, and — once they are revived and cleaned up — sell stakes in them.
But this works against the political timetable of 2019. Most banks cannot be fixed in less than three years.
The author is editorial director of Swarajyamag.com
Guest Author
The author is editorial director of Swarajyamag.com