Public Sector Banks Must Move Beyond Recapitalization Bonds : Daily Current Affairs

Relevance: GS-3 : Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment

Key Phrases: Recapitalisation Bonds, Market funds, NPA, Bad Loans, Privatisation, Recurrent Recapitalisation of PSBs, Prompt Corrective Framework.

Why in News ?

RBI Governor Shaktikanta Das has recently asked Public Sector Banks (PSB) to strengthen their lending capacity by raising capital.
It’s time for the PSBs to move beyond recapitalization bonds, raise market funds and the Centre to accept 33% ownership of state-run lenders .

Background :

Public sector banks (PSBs) have suffered a grievous injury when they ended up with a huge amount of gross non-performing assets (NPAs) or bad loans, which peaked at ₹8.96 trillion in March 2018, or around 14.6% of total loans.

Healing Process of PSBs :

The PSBs have gone through a healing process after suffering through a huge amount of bad loans.
As of December 2021, their bad loans have fallen to ₹5.59 trillion, or around 7.9% of total loans. This happened primarily on account of :
- Bad loans being written off after four years
- The recurrent recapitalization of PSBs by the government
- The recovery of a few bad loans, and the banks being put through the prompt corrective action (PCA) framework by the Reserve Bank of India (RBI).

What were the steps taken by the government to help the failing PSBs :

Over the years, the bad loans of PSBs had to be written off against their accumulated capital.
Hence, for these lenders to stay operative, the government as their major owner had to regularly invest fresh money in them.
From 2010-11 to 2017-18, the Centre has infused ₹1.12 trillion.
The money for rescue came from the Union budget.
This helped PSBs stay in operation despite their huge bad loans.

Introduction of Recapitalization Bonds :

In October 2017, the government came up with the idea of issuing recapitalization bonds to put fresh money into PSBs. These bonds helped the PSBs revive in the following manner :
Let’s say a bank is needed to be recapitalized to the extent of ₹2,000 crore.
The government then issued recapitalization bonds worth that amount, and the bank then used its deposits to buy these bonds.
The Centre then re-invested this money back into the bank. This ensured two things :
- First, any bank which was running short on capital was adequately capitalized.
- Second, the government didn’t have to spend any money from its budget, at least not immediately.
The government has to pay an annual interest on these bonds to PSBs. The interest amounts to anywhere between 6% and 8% a year.

Benefits of Recapitalisation Bonds :

By issuing these bonds, the government basically pushes back an expenditure that it should have made at a given point of time.
In total, the Centre has issued recapitalization bonds worth ₹2.79 trillion so far. These bonds will mature from 2028 to 2036.
When they get mature, the money for repayment will have to come from that year’s budget.
Hence, bank recapitalization bonds are similar to the oil bonds issued by previous governments to compensate oil marketing companies for their under-recoveries while selling petrol, diesel, domestic cooking gas and kerosene.
In both cases, the government of the day postponed expenditure.

What is the Suggested Government’s Share in PSBs ?

The Centre needs to own at least 51% of the shares of a public sector bank at any point of time.
If a PSB raises money from the stock market, this would automatically lead to some dilution of the government’s stake.

What is the status of the government's share in PSBs ?

As of now, the government’s shareholding in many of these banks is high enough for that not to be a worry.The government owns around 73% of Punjab National Bank, 64% of Bank of Baroda and 80% of Indian Bank.

What are the challenges being faced presently by the PSBs ?

The valuations of these banks, despite recent improvements, are very low in comparison with private banks.
Hence, they cannot raise enough money by selling new shares on the stock market, and letting the government’s stake decline to 51%.

What Needs to be Done Now ?

Banks are encouraged to raise capital from sources other than the government.
It is time to implement a recommendation that the Committee on Banking Sector Reforms of 1998 (the Second Narasimham Committee) had made.
It had recommended that the minimum shareholding of the government in PSBs be brought down to 33%.
Doing this has become all the more important given that PSBs have constantly been losing market share to private banks since 2010.
The only way they can stay in competition would be by lending more, and for that to happen, they need more capital.

What is the Share of PSBs in Loan Disbursement ?

As of March 2010, PSBs had given around three-fourths of all outstanding bank loans in the country. The share of private banks stood at 17.4%.
As of December 2021, the share of PSBs was down to a little over 55%, with the share of private banks having risen to 36.5%.
This implies that newer loans are being given more by the private banks.

Conclusion :

While individual PSBs are not being privatized, the general privatization of India’s banking sector is being done for more than a decade.
If the government wants this to slow down, then it needs to come around to the idea of owning just 33% of their equity.
Else, most of these banks won’t really matter in another decade or so.

Source: Live Mint

Mains Question :

Q. What are the Recapitalisation bonds ? What are the challenges being faced presently by the Public sector banks? Suggest measures to overcome these challenges. (250 words )