Aditya Raj Das
As part of exercise to infuse the much needed reforms in the banking sector, especially in the public sector, the BJP-led NDA government just on the eve of 2018 has provided over Rs 7,500 crore fresh equity to six stressed state-run banks.
While asserting its commitment to keep state-owned banks well-funded, the government has explained the basic idea behind this move is to help public sector banks (PSBs) to meet the prescribed regulatory capital requirement.
These six stressed state-run banks are Bank of India, IDBI Bank, United Commercial Bank, Bank of Maharashtra, Dena Bank and Central Bank of India. These banks have received equity through preferential issue of shares.
As the financial services’ secretary Rajiv Kumar says, “Banks will not suffer due to shortage of regulatory capital. But, we will monitor their functioning to ensure that they undertake clean, responsible and prudent business to enhance stakeholder value.”
In the face of rise in non-performing assets (NPAs) in the banking sector, particularly in the public sector, the government has been working on a fiscal strategy to push ahead with banking sector reforms alongside infusion of fresh capital in state-owned lenders in the new year as it looks to lift banks out of NPA-crisis and revive lending growth from a 25-year low.
The Modi government in October 2017 had announced infusion of an unprecedented Rs 2.11 lakh crore capital over two years in public sector banks that are reeling under NPAs. Their NPAs have increased more than 2.5 times to Rs 7.33 lakh crore as of June 2017, from Rs 2.75 lakh crore in March 2015. In the last 3.5 years, the government has pumped in more than Rs 51,000 crore of capital into PSBs.
Of the Rs 2.11 lakh crore package, the government had indicated that Rs 1.35 lakh crore would be infused through re-capitalisation bonds. Since then, the finance ministry had been working on contours of the re-capitalisation bonds and the amount to be front-loaded during 2017-18.
In the union budget for 2017-18, the government had budgeted for Rs 10,000 crore for re-capitalisation of public sector banks but, given the increase in NPAs, the allocation is set to be enhanced in the next budget for 2018-19. As finance minister Arun Jaitley has indicated while presenting the budget that the government has decided to put in more capital from the budget, through bonds and banks’ equity expansion and “therefore, it is the country which is virtually going to pay to keep the banking system in good health”.
As financial experts point out that the capital infusion in banks is not going to be an easy affair as it has to be backed by a string of reforms, including strengthening of bank boards, resolution of NPAs and HR issues so that they do responsive and responsible banking in future.
As finance minister Arun Jaitley has indicated that the government will put strict conditions in place to avoid a repeat of unbridled lending that has resulted in record NPAs for Indian banks, especially those in the public sector.
Echoing finance minister’s views, financial services’ secretary Rajiv Kumar has on record saying, “Reform agenda is the highest priority which has to be implemented along with capitalisation. A whole lot of reforms will come so that genuine borrowers do not suffer and get hassle-free, need-based credit.”
Under the strategy of revitalising, the state-run banks special focus would be on micro, small and medium enterprises, financial inclusion and job creation. At the same time hinting at reforms, government intends to inject in state-run banks. The finance minister has committed that the government would not interfere in commercial transactions.
But at the same time, he has asserted that “when the system is making all these changes and all these monetary contributions in order to strengthen the banking system, we want a robust public sector banking system so that their ability to support growth itself increases.”
As part of exercise to bring about radical reforms in the state-run banks, the government is looking at the workable and profitable merger of public sector banks.
To facilitate consolidation in the public sector banking space, the union cabinet in August 2017 gave in-principle approval for PSBs to amalgamate through an alternative mechanism (AM). Subsequently, under the chairmanship of finance minister Arun Jaitley, a panel was set up to examine proposals from banks for in-principle approval to formulate schemes of amalgamation. A report on the proposals cleared by it will be sent to the cabinet every three months.
As part of twin objective of bringing about reforms in the banking sector and resolve to bring down burgeoning NPAs, the government had issued two ordinances – Banking Regulation (Amendment) Ordinance, 2017 and Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 – during the year.
The Banking Regulation (Amendment) Ordinance, 2017 gave way to the Act permitting the Reserve Bank of India (RBI) to direct any bank to initiate insolvency proceedings and give directions for resolution of stressed assets.
The RBI’s internal advisory committee identified 12 large stressed cases worth over Rs 5,000 crore, accounting to 25 per cent (Rs 1.75 lakh crore) of total gross NPAs, for proceedings under the insolvency and bankruptcy code.
Subsequently, the central bank advised banks to set aside 50 per cent provisioning against secured exposure and 100 per cent against unsecured exposure in all cases referred for bankruptcy.
In a blow to defaulting promoters seeking to reclaim their firms that are under insolvency proceedings, the government had promulgated another ordinance to bar wilful bank loan defaulters as well as those with NPA accounts from bidding in auctions being done to recover loans. The ordinance, which has already been passed in the Lok Sabha, aimed at putting in place safeguards to prevent unscrupulous persons from misusing or vitiating the provisions of the Insolvency and Bankruptcy Code (IBC).
The amendments would be applicable to cases where the resolutions are yet to be approved. The changes essentially mean that certain promoters would not be allowed to bid for their own assets under the insolvency proceedings initiated to recover overdue loans. Analysts feel once this ordinance is approved by Parliament, it will play a catalytic role in bringing down the NPAs. This in turn will usher in the much needed reform in the whole spectrum of the banking sector.
In a bold move, the RBI in its second list of big defaulters has asked banks to resolve 28 large accounts till 13 December or report them by 31 December, 2017 to NCLT for insolvency proceedings.
As sources in the banking sector say banks are set to refer as many as 23 accounts for insolvency proceedings. These 28 accounts together account for 40 per cent of bad loans or around Rs 4 lakh crore.
As part of exercise to push ahead the reforms in the state-run banks, the government has facilitated the merger of five associates of the Stare Bank of India (SBI) and the Bharatiya Mahila Bank with the SBI catapulting the country’s largest lender to among the top 50 banks in the world. With the merger, SBI joined the league of top 50 banks globally in terms of assets.
It goes without saying that in the overall strategy of spurring the growth momentum of the economy, innovative and at the same time pragmatic reforms in the wide spectrum of the banking sector is the need of the hour.
(PTI)
