Perhaps, what has been the single-most important issue governing the performance of the economy, is the fact that PSU banks, being the most trusted repository of public money, have not been quite ‘healthy’. Non-Performing Assets or simply corporate/private loans, have dragged down credit ratings of not only private financial instruments but also national debt instruments. This is a growing concern. With this huge amount of deficit, and the Government trying to keep these units alive by constantly infusing money, Recapitalization has been a high priority for all the stakeholders.
Situation of NPA’s
The Financial Stability Report, 2017, released by the RBI, states that India’s gross NPAs stands at 9.6%. This figure is the sum of all stressed assets held by lending institutions in the country including co-operatives and small banks in addition to government and private banks. The increase in NPAs have been consistent year-on-year.
Figure 1: Increase in PSU NPAs – LiveMint
So, what is Recapitalization?
Recapitalization, is that practice which adequately provisions for NPAs as well as for the bank in question’s growth activities. Recapitalization has been done through various methodologies in chronological fashion. Since 1980s we have seen the introduction of Bank Recapitalization Bonds to cater to the financial requirements of these institutions.
We have recently also seen the inclusion of instruments such as ETFs which generate capital infusion from both private and institutional investors. Majority of these instruments are close ended, hence the capital infused is secured for a specific period. This enables the current dispensation to ensure that fiscal deficit is not increased due to recapitalization requirements of stressed banks.
What is the way forward?
Given that we have seen how methodologies, that inject money into the government treasury, for specific purposes, have had less of an impact on the fiscal deficit, it is natural that we should employ much of Close Ended Exchange Traded Funds which divest in PSU Banks only minutely. Not only will it provide the banks the current leverage to maximize its revenues and profits, but will also provide a chance for the banks to meet its return requirements. While Government infusion is needed, most of investment could come from these financial instruments.
CPSE ETF, one of the government’s flagship ETFs had a 10.87% weightage distribution in financial services. Followed by the Bharat 22ETF which had been subscribed 4 times. The Rs 8,000-crore issue had received highest subscription for any new fund offer (NFO) ever. The government later raised the issue size to Rs 14,500 crore. And the weightage for financial services increased to 20.3% which included PSU banks like SBI and Bank of Baroda. This helped in meeting the government’s requirement of 7200cr capital infusion.
While it is necessary for the Government to infuse money into these stressed banks, it is also equally important that the Government should find alternative ways to reduce its financial deficit obligations and continue onto providing infusion for other developmental activities. This will not only assist in reducing debt but would provide all banks the opportunity to receive equity investors which it wouldn’t have received given its issues with NPAs. Finally all banks should follow Basel 2 and 3 credit risk management principles to reduce further default.
Written By Ishaan Sengupta For E5 summit at IBS Hyderabad Organized by Managers Without Borders
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