The government has infused in public sector banks nearly  ₹2 trillion in the past two fiscals, higher than the original plan of  ₹1.55 trillion over the same period. (Bloomberg)
The government has infused in public sector banks nearly 2 trillion in the past two fiscals, higher than the original plan of 1.55 trillion over the same period. (Bloomberg)

Bank recapitalisation: Govt throwing good money after bad?

  • The government's bank recapitalisation plan was aimed at boosting better-performing banks, but that hasn't happened
  • Banks with highest NPA ratios received largest amount of capital as a proportion of their risk-weighted assets

The government’s latest capital infusion into public sector banks has taken its total aid to over 1 trillion for FY19, and nearly 2 trillion for the past two fiscal years. When the bank recapitalisation plan was first announced, the government had talked of an infusion of about 1.55 trillion over a two-year period.

Besides, the intent was to give capital to better-performing banks. But as the chart compiled by Moody’s Investors Service shows, the dole-outs have been larger for the weaker banks. Banks with the highest high bad loan ratios received the largest amount of capital as a proportion of their risk-weighted assets.

Besides, as the ratings agency points out, recovery can be a long-drawn process.

The weakest public sector banks have benefited the most from the government's bank recapitalisation plan.
The weakest public sector banks have benefited the most from the government's bank recapitalisation plan. (Naveen Kumar Saini/Mint)

“A key hindrance to a faster turnaround is slow progress in the resolution of legacy non-performance loans (NPLs) and the need to build up provisions against those assets. Although the resolution process at the National Company Law Tribunal has been initiated for most large NPL accounts, progress has been slower than we anticipated, and a complete clean-up of legacy problem loans could take more than two years," Moody's said in a note.

In this backdrop, it’s imperative that the government develops better accountability systems to ensure the banks that received its largesse pull up their socks and ensure a repeat does not happen.

The silver lining is that the capital will help improve liquidity and lower finance costs.

“The recent action taken by government in form of capital infusion or announcement of mergers should enable 7 out of 11 banks to come out of PCA (Prompt Corrective Action) in the near term. This would also free up domestic liquidity as these banks have a deposit market share of 12.3% and loan market share of 10.9% with a loan to deposit ratio of 68%," analysts at Antique Stock Broking Ltd said in a note.

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