Budget 2016: The challenge of providing funds to banks

Krishnanand Tripathi
File Photo: Reserve Bank has asked banks to disclose their NPAs and clean up balance sheets by March 2017.

File Photo: Reserve Bank has asked banks to disclose their NPAs and clean up balance sheets by March 2017.

Just ahead of budget, a spate of negative news about the banking sector has made headlines. As per latest reports, bad loans or non performing assets of public sector banks are expected to reach over Rs. 4 lakh crore during the financial year ending in March this year. The figure was 3.27 lakh crore or 4.6% of total advances of public sector banks in March last year.

Finance Minister Jaitley has a major challenge of providing capital to public sector banks in this year’s budget for the expansion of their business. Providing adequate capital to public banks is also important to maintain momentum in the economic growth. As per the information furnished by the government in the Rajya Sabha, public sector banks require additional Rs. 1.8 lakh crore in the next four years.

As per reports, public sector banks have writen off bad loans worth 1.14 lakh crore in last three years alone. Last year Finance Minister provided over 9500 crore rupees in the budget to shore up the capital base of government owned banks. But that is hardly enough. The government committed to provide Rs. 25,000 crore in FY 2015-16 to public banks, same amount is to be provided in FY 16-17. There after the government committed to provide Rs. 10,000 crore each year in FY-1718 and FY18-19.

Sunil Sinha, principal economist of credit rating agency, India Ratings & Research told Rajya Sabha TV: If you look at the quantam of the fund required then it’s not possible for the government to capitalise the banks. It has to be a mix of…one budgetary allocation and on the other hand the govt. may allow them to tap the capital market by diluting the stake.”

Another option before the government is to allow public sector banks to sell their stake in stock market to raise capital. Jayant Sinha, minister of state for finance, has in recent past said that the government might allow the public sector banks to bring down the government’s stake to 51%.

But low valuation of public sector bank stocks is a problem. Sunil Sinha, who tracks macro economic indicators of banking sector for India Ratings & Research says: “The dilemma that the govt would face is that with this kind of balance sheets if the banks go to the capital market then the kind of valuation they’d get will be a dampener.”

As per an assesment done by Reserve Bank of India, public sector banks require 2.4 lakh crore rupees by 2019 to meet Basel-III norms.

Even if the government is able to inject Rs. 70,000 crore in four years, public sector banks will still need over Rs. 1.7 lakh crore in next four years to meet the Basel-III norms.

In August, 2015, the government had announced a slew of reforms called rainbow reforms for public sector banks. It included empowerment of bank management, creation of banking bureau boards to induct talent in top management of public sector banks, recapitalisation of banks and destressing the balance sheets that are burdened with stressed assets.

However, there is no visible change in the situation. The steep rise in bad loans of public sector banks has made headlines in recent times. Even the country’s apex court has asked the banking sector regulator to reveal it the names of top 10 defaulters and the steps taken by the banks to recover public money.

But the government has few choices before it. Indian public sector banks are fulcrum of economic activity in the country. Public ownership of major Indian banks is often cited as one of the reasons for the country surviving the 2008 global economic crisis when many top global banks and financial firms went bust.

However, this public ownership of public sector banks may also lead to the charges of interference in their functioning.

NR Bhanumurthy, a professor of economics at, national institute for public finance and policy (NIPFP) in New Delhi told RSTV: “We’ve been saying that this is going to be huge issue for monetary policy transmission until you address the issue of NPAs. There are two issues, why only public sector banks are sitting on huge NPAs compared to public sector banks? Second, what is the role of bank boards?”

Bhanumurthy says that there is a need to see what is the origin of these NPAs on the books of public sector banks. Whether these NPAs originated in the books of public sector banks or were transferred from private banks? We need to study that so that there is no repeat of this problem in future.