Is the government’s bank recapitalisation plan a bailout?
The government’s mega recapitalisation plan for public sector banks is being touted as a win-win for all and has set stocks of these banks on fire.
The largest shareholder will recapitalise the banks it owns by infusing a mammoth Rs2.11 trillion over two years, of which Rs1.35 trillion will be through so-called recapitalisation bonds.
Most public sector banks’ shares surged more than 20% (State Bank of India rose the highest since 1994) as suddenly, valuations of these lenders are looking appealing. Investors are having a red-letter day but it is obvious that further upside would depend on how smartly the banks utilize the money.
Indeed, the plan is expected to be a cash-neutral exercise for the government, hardly making a blip on its fiscal deficit. This was crucial because the centre’s finances are already stretched. This was also the reason why the bond market didn’t balk at the additional supply load staring at it and benchmark yields rose only marginally.
For public sector banks, it was a case of swim or sink after they had piled up an unmanageable stock of bad loans. Since a handful of lenders were perilously close to sinking with capital adequacy levels slipping below regulatory requirements, the government had to resort to drastic measures; hence the bank recapitalisation plan.
Analysts are hailing the move and even Reserve Bank of India governor Urjit Patel termed the plan “monumental” in his statement.
But is it so?
The recapitalisation amount resembles a lifeboat and Morgan Stanley cheekily calls it the Indian TARP, after the Troubled Asset Reconstruction Plan of the US during the global financial crisis.
Public sector lenders were sitting on a bad loan pile of Rs7 trillion as of June and this would have swelled further as of September. Barring a handful of lenders, the provision coverage ratio of most banks skims around 50% and that leaves a huge chunk of toxic loans uncovered. Stressed borrowers referred to the National Company Law Tribunal under the Insolvency and Bankruptcy Code will probably result in big haircuts for banks. Crisil Ratings estimates the cuts to be Rs2.4 trillion. This gives a fair idea as to where a part of the recapitalisation money will find its way— towards future provisions.
For public sector lenders to truly be back in the business of lending, it would take more than the infusion. It would need corporate customers to come back with outstretched hands for loans. Until then, the government’s money is just another dole to help lenders stay afloat and to return to profits.