Why Capital Infusion In Public Sector Banks Is A Welcome Move

Apart from the entrenchment of big-ticket political corruption, the systematic ruin of the banking sector could be considered as one of the most tangible contributions of the United Progressive Alliance (UPA) government. Arbitrary lending to big corporate houses had placed many public sector banks (PSBs) at the brink of near-ruin with more than 40 borrowers from PSBs being marked for bankruptcy. The extent of bad loans, courtesy the UPA, goes over Rs 8 lakh crore and banks have been saddled with non-performing assets (NPAs) and bank credit has dried up faster than ever. It remains one of the most disastrous problems bequeathed to the Modi government.

The government had earlier declared an ambitious bank recapitalisation programme worth Rs 2.11 lakh crore through which fresh funds would be infused into the banking system. While some economists had argued that there were other ways of going about this problem, including the privatisation of PSBs, recapitalisation remains the most accepted, tried and tested as well as pragmatic option in the present context. The banks are in bad shape and if in theory they are privatised, they will be unable to raise any capital from the market and that would land the country in a bigger soup.

Yesterday (24 January), the Finance Ministry revealed the blueprint for the process and kicked off the mammoth task of banking reforms. The Reform Agenda incorporates EASE or Enhance Access and Service Excellence. A list of six performance metrics, including customer responsiveness, responsible lending, credit off-take, financial inclusion, digitisation and, importantly, Udyogi Mitra, or lending to the micro, small and medium enterprises (MSME) sector were outlined. The government reiterated that the recovery of bad loans will not be impeded in any way and the PSBs have to re-examine and revamp their lending practises to big corporates.

While one of the first accusations of the opposition against the government was calling it a ‘suit boot ki sarkaar’, in effect, the repercussions of cronyism are being cleaned up through this reform process. It is still a bitter pill, like every reform is, but it should not be forgotten that it is cleaning the mess of the previous government. Finance Minister Arun Jaitley said it was not just a way of resolving the bad loan crisis and working towards strengthening the investment cycle, it was also a way forward to systemically create provisions to prevent banks from falling down the rabbit hole again.

Under the metric of responsible lending, it has been clarified that consortium loans need to happen with a minimum exposure of 10 per cent so that smaller banks in the consortia also have a say in the process. All loans upward of Rs 250 crore have to be monitored for credit exposure, and due diligence has to be exercised before the sanction of such loans. Banks have also been asked to set up a Stress Asset Management Vertical to deal exclusively with the recovery of loans. Banks will also have to identify their non-core assets to monetise them. Apart from all this, there will be a survey conducted annually on adherence to the EASE parameters and the banks will be ranked according to it.

Therefore, there are adequate measures and a process put in place to ensure that the problem of arbitrary lending to big corporates is checked. While the banks will take some time to recover from the mess, this reform process will go a long way in spurring investment and lending, particularly in the MSME sector. In the short run, the reform process will hopefully insulate the economy from the mistakes of the past; in the long run, it will ensure that the banks stay away from this point of almost no return.