Classic parenting defies business and logic, and the government’s bank recapitalisation plan is nothing but an age-old parenting technique that eventually tends to beget more problems.
In the first tranche of the mammoth Rs2.11 trillion recapitalisation plan, the government finally went back to carpet infusion, giving money for capital to all but one public sector lender (Indian Bank).
Recall that the centre was shouting from the rooftops just a year ago that it would not give money to banks that do not perform well and are inefficient.
But now, it has given the money upfront as a show of faith that its banking babies would learn their ways. And like an indulgent parent, it would help.
The government will infuse a total of Rs88,139 crore into 20 public sector banks which account for more than 80% of the colossal Rs8.4 trillion worth of bad loans.
Of course, like any other parent does, the government will give more money to the weakest ones—11 lenders under the Reserve Bank of India’s Prompt Corrective Action will together receive Rs52,311 crore or the lion’s share of the total amount. These are banks that cannot even meet the regulatory minimum in capital.
But no bribe is bereft of an unless-you-do-as-I-say rules of behaviour. And here the government has hardly veered from its rhetoric, offering as few details as possible.
Lenders will need to play to their strengths and not lend indiscriminately. They will also need to cut down on their hobbies, that is, sell off their non-core assets and rationalize their branches.
But let’s not be too harsh on the government. It has given some specific instructions this time. To be part of a consortium of lenders, the bank will have to lend at least 10%. This makes future resolution easier as tiffs among members of a joint lending forum will reduce as every lender will have enough teeth in the game.
Every bank will need to have a stressed asset vertical for timely recovery and resolution. Most lenders have already put one in place.
The trouble is that the government has increased surveillance and stayed mum on how much freedom it will give banks.
Unless it distances itself from banks categorically, public sector banks will hardly come out of their habit of being inefficient. The capital infusion makes the government’s hold on banks only tighter.
It is high time that banks and bank managements are let go from the government’s influence. Until then, value creation will elude all stakeholders.