There's More To Bank Clean-up Than Re-cap Funds

At first glance, the decision to provide for only Rs 25,000 crore in the Union Budget for 2016-17 to recapitalise state-run banks looks like small change, but a closer reading of several other announcements indicate much more is on offer; just that it's unsaid.

Said Union Finance Minister Arun Jaitley: "Banks are putting in special efforts to effect recoveries, with a focus on reviving stalled projects. To support banks in these efforts as well as to support credit growth, I have proposed an allocation of Rs 25,000 crore in 2016-17 towards recapitalisation". He further added if additional capital is required by these banks, the government will find the resources for doing so. "We stand solidly behind these banks," he added.

The unsaid…

The essence of what Jaitely said -- and what is unsaid -- can be summed up as follows. The current ratings and public perception of state-run banks is derived from their quasi-sovereign nature. No government - whatever be its hue - can afford to ignore this truth. Then a whole lot of social schemes which are key to get push the credit-profile of semi-urban and rural India is pushed through by state-run banks. Let's also not forget these banks account for 76 per cent of the banking system's assets. Any dream to propel the economy to a higher growth orbit needs the support of these banks. If the Centre were to hiccup on capital with regard to these banks, the stakes for any ruling dispensation is far too high.

The feeling that not enough funds have been provided for the recapitalisation of state-run banks is a reflection of the general perception that dud-loans have sky rocketed; that it's not enough to fix them. Now while there have been fresh slippages, what's not appreciated is that dud-loan data is now being captured quicker; and Mint Rood has pushed banks to provide for them aggressively. The spike in dud-loans in the last quarter is reflective of this; not that credit profiles have suddenly gone for a toss.

And recapitalisation is not the only way to fix the rot at state-run bank. Take the institutional move in the Budget that Jaitely refers to: "For speedier resolution of stressed assets, Debt Recovery Tribunals will be strengthened with focus on improving the existing infrastructure, including computerised processing of court cases, to support reduction in the number of hearings and faster disposal of cases".

That a reference to what Arundhati Bhattacharya, chairperson-Stat Bank of India told BW Businessworld (February 8th): "It's has also been proposed that commercial courts be set up. They will be specialists, not something to do with commercial, something to do with civil society. But yes, resolution (of bad-loans) in India takes too long; we need to get this timed down. In Germany and the US, it is nine month; whatever be the amount that is to be received is received by creditors".

Says Arvind Mahajan, Head of Infrastructure and Government Services at KPMG (India): "The proposals to strengthen banks along with the Bankruptcy Law will enable strategic restructuring of stressed and stalled infrastructure projects. Effective execution on this will be positive for the infrastructure sector and the economy".

Mahajan explains the focus on private-public partnerships (PPP) to start the private investment cycle by addressing key challenges through the three-point framework -- Resolution of Dispute Bill; guidelines for renegotiation of PPPs; and talk of new credit rating system for infrastructure projects -- is commendable. "Implementation of these measures would be the key", he says. A whole of bad credit lies in existing PPPs; if they are resolved, dud-loans can be salvaged; and banks can breathe easy. In turn, we may see fresh flow of credit to these rejuvenated projects.

Another factor that's gone below the radar is that state-run banks have huge real estate resources which are held at "historical costs" on their books. If these are sold to a REIT -- Real Estate Investment Trust - and then leased back; it can improve the liquidity of these banks. These proceeds can also be used to clean up their balance-sheets.

And then, there's monetary policy. The decision by Jaitely to bite the bullet and stick to the fiscal deficit target of 3.9 per cent has cheered the government securities (G-Secs) market - the benchmark 10-year sovereign bond fell 15 basis points to 7.63 per cent soon after news hit the markets. Rumours are rife that Reserve Bank of India (RBI) governor, Raghuram Rajan may oblige with a rate cut soon enough. If that were to happen, the G-Sec portfolio of banks will appreciate hugely; these gains can be used to clean up the books of state-run banks who are the largest holder of G-Secs. It's a strategy that former RBI governor, Bimal Jalan, used to good effect.

Bottomline: there's more to bank clean that just recapitalisation funds.