17 October 2018

Editor's Space

Recapitalisation Fig Leaf


NPA problem in India’s banking sector had been festering too long due to political indecisiveness and an aversion to swallow bitter pill of resolving these NPAs. So the Finance Minister’s announcement of a Rs.2.11 lakh crore bailout for public sector banks was inevitable, to kick start the investment cycle anew and allow the much awaited job generation, something critical for India’s economy now. Public sector banks have a bad-loan ratio almost twice as worse of private sector banks. At last count, NPAs accounted for over 10 per cent of banks' advances. So government's plan to recapitalize its banks was inevitable and long awaited, and came as no surprise. However, the quantum of a meager $1.5 billion set aside specifically to recap banks in the last federal budget was laughable. This time round PSBs with NPAs will get Rs.1.35 lakh from bonds, Rs.18,000 crore from the Budget, and will have to raise the remaining Rs.58,000 crore through share sales. According to Fitch Ratings, India will need nearly $65 billion in bank capital by March 2019, so the current recap figure remains meager and miniscule. After dithering over recapitalising the PSBs for too long, the Finance Minister’s bail out for these banks with a meager recapitalisation is like a Fig Leaf, and too little and too late!!!


Market watchers still remain skeptical of this scant bailout, and unimpressed. Vinod Rai, Chief, Banks Board Bureau, has cautioned to be prudent till the PSBs stabilise first before embarking on the much overdue consolidation of Indian banking. Although the recap was necessary to put NPA and bankruptcy cases on the fast track, it is equally critical to ensure NPA resolutions proceed on an economically viable business case. For example when Essar Steel was put up for sale under the Insolvency and Bankruptcy Code (IBC), recently, Ruias –original promoters of the company – are also bidding for it.


Essar has a bad record of NPAs and had to sell their Vadinar Refinery to reduce its long standing debt. Most NPAs are in private sector, mostly funded by PSBs. Allowing defaulters to bid afresh for their own NPAs stinks of Crony Capitalism!

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