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Late, But A Good First Step

Rs 2.11 lakh crore in capital to be infused into state-run banks

Photo Credit : Bloomberg


At long last, the Centre has decided to grease the skids. The move to infuse Rs 2.11 lakh crore in capital into state-run banks will help take care of two issues — provide for bad-loans on their books and take a hair-cut if needed; and when the time is opportune, be able to lend to viable projects.

 Of the Rs 2.11 lakh crore, the lion’s share will be front-loaded through recapitalisation bonds (recap-bonds) of Rs 1.35 lakh crore; Rs 76,000 crore through Budgetary support and equity raised from the bourses. These amounts, it is hoped will cover for both current dud-loans (and hopefully, fresh slippages); and capital needs under Basel-III norms which kick in from 2019.

“It is possible that these bonds may not involve cash flow. We would need to see how this works out. Going by the IMF such bonds may not be included under fiscal deficit — as it does not add to the spending spree… Hence, it will not crowd out private investment,” says Madan Sabnavis, Chief Economist at Care Ratings.

 Much has been made of the measure being a classic case of throwing good money after bad; those who so carp provide little by way of an alternative. Worse, the idea has worked perfectly well in the past, and there is no need to pillory the government on it. In the early 1990s, state-run banks were done in by wanton lending to both the priority and corporate sector. With reforms came pressure to comply with Basel norms — the early versions of it. Recap-bonds were the answer; some were later converted into marketable securities.

 What would be of interest would be to see if all state-run banks get like treatment on capital infusion. It would come as no surprise if the better among these banks were to get a bigger boost; the weaklings may have to settle with just enough to comply with Basel-III; and who knows,  down the line may well be merged with the better of the lot.

It’s also unlikely that recapitalisation (the timeframe of infusion of funds is still to be announced) will lead to banks turning keen to lend in a big way in a jiffy. Their immediate concerns will be on house-keeping; and in any case, India’s Inc.’s capacity utilisation hovers around 70 per cent. It’s safe to assume that credit appetite will not spurt — all too sudden — for at least a good two quarters. But it’s good to have money in the bank!

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