Get App
you are here: HomeNewsBusiness
Last Updated : Jan 06, 2020 08:14 PM IST | Source:

Having spent Rs 2.8 lakh crore, govt should not starve PSU banks for capital at this stage

There are six reasons why the timing may not be right for the government to turn off the funding tap for PSBs.

Representative image
Representative image

Since coming to power in 2014, the National Democratic Alliance (NDA) has pumped in around Rs 2.8 lakh crore towards repairing the bad loan-wrecked balance sheets of public sector banks (PSBs). So far in FY20, it has nearly spent all of the Rs 70,000 crore earmarked for these banks.

But in Budget 2020, the government is unlikely to infuse fresh money in PSBs and would instead prod them to speed up bad loan recovery and raise money from the market or by selling non-core assets, PTI reported.

There are six reasons why the timing may not be right for the government to turn off the funding tap for PSBs.


One, to begin with, state-run banks are just emerging out of a painful non-performing asset (NPA) clean-up exercise. A good chunk of the capital infused so far this fiscal has gone towards fixing the balance sheets of PSBs and helping them streamline operations following the mega-merger exercise consolidating 10 banks into four.

Minus this money, these banks are actually low on capital in the event of a demand revival next fiscal. Right now, banks aren’t feeling the pinch as demand for loans is tepid because of a slowing economy. (Also read: Credit woes | Banks ready to lend to firms, then why is loan growth plunging) But, the banks are ill-prepared for a strong demand revival.

Two, in 2020, the biggest challenge for banks won’t be NPAs, but managing credit growth. The recently published Financial Stability Report (FSR) of the RBI has forecast gross NPAs of banks to slightly inch up to 9.9 percent of total advances by September from 9.3 percent as at March 31, 2019.

Even then, the broad consensus in the industry among bankers and analysts is that banks may be past the peak of NPA woes after the asset quality review initiated by RBI under Raghuram Rajan in 2015. Also, most of the big NPA accounts have been taken to bankruptcy courts and banks have made significant provisions to cover up such loans.

Three, the government’s hypothesis that state-run banks should fend for themselves in the market may not be a workable idea in the immediate future. There are not too many investors to put money on the table for PSBs, except in the cases of some large, well-run banks like State Bank of India. That’s one of the reasons why, despite the bull run in the stock market, stocks of most PSBs are struggling. It won’t be a prudent idea to leave government banks, which control 70 percent of the industry by assets, to the mercy of markets when investor appetite is poor.

Four, it is a good thing to nudge banks to speed up bad loan recovery, but the government shouldn’t be blind to economic reality. The ability of the companies to repay lenders is intertwined with the health of the economy. With the economy in the dumps, cost overruns and low capacity utilisation have severely impacted the cash flows of most companies.

Recovery of loans won’t be easy in the present scenario for banks. Even in the cases that have been pushed to National Company Law Tribunal (NCLT), the resolution may take much longer than the scheduled period. Here, one of the big challenges for banks will be to find genuine buyers for distressed assets. That’s one reason why only a few large cases have been resolved so far.

According to official data, only about 15 percent cases admitted to NCLT have produced a resolution plan. There have been a few large cases like Bhushan Steel and Essar Steel where a resolution has been reached. Even if one accounts for smaller cases, the total recovery so far from NCLT proceedings will work out to less than Rs 1 lakh crore.

Five, a pick-up in bank credit growth and economic recovery are interlinked. To get the economy back on the growth path, the government must work on both sides simultaneously. It should make sure banks are in a position to deliver when demand revives. This is easier said than done, but the task is cut out for Finance Minister Nirmala Sitharaman.

Six, the government has done well to introduce the Insolvency & Bankruptcy Code (IBC) and backing the NPA clean-up process carried out by RBI beginning 2015. But, one of the old promises -- privatisation of PSBs -- made by Prime Minister Narendra Modi when he first got the large public mandate in 2014 remains unfulfilled.

Except for the LIC-IDBI bank deal (which wasn’t privatisation in a true sense), there has been no attempt to sell off the weak state-run banks and get private investors on board. Till the time, the government refuses to bite the bullet, the onus is on the state to keep filling the funding void in state-run banks. Period.

Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.
First Published on Jan 6, 2020 01:12 pm
Follow us on