₹25,000 cr for recapitalisation of banks not enough

In the run-up to the Budget, the one thing that many market men and industry representatives expressed repeatedly in their wish-list was that they wanted a believable and credible document. Finance Minister Arun Jaitley has, therefore, tried hard to meet these expectations — and delivered a mixed bag.

This Budget was closely watched for what it had to say about bank recapitalisation. In the previous Budget, the government had announced an infusion of ₹70,000 crore spread over four years; in 2015-16, ₹25,000 crore was infused.

This was seen as grossly inadequate even a year ago. This year has been miserable for banks, withall of them seeing a sharp rise in bad debts and provisioning expenses.

Their capital-adequacy ratios and net worth, in some cases, are precarious and will need immediate infusion of capital or run a serious risk of downsizing of their business.

Given this background, the Finance Minister’s reiteration that he would allocate ₹25,000 crore as capital (on the lines that he had already laid out) could not have been very encouraging. But he did say that the Centre would stand solidly behind the banks and, therefore, would find the resources necessary in case they needed more capital.

It is almost certain that public sector banks will need it. And if he were to find it through regular means, it is likely to disturb the fiscal deficit number that has been laid out. During the current fiscal, it has been possible to stay within the target because of the oil prices bonanza. It is doubtful if we will have the same luck for another year.

Perhaps, another round of recapitalisation bond issue is round the corner (as was done 20 years ago). And it may be accompanied by some regulatory relaxation — possibly a reinterpretation of some of the existing reserves in bank balance sheets that can qualify as capital under Basel III norms.

The Finance Minister did not say anything controversial about mergers or consolidation or privatisation — knowing that these are provocative. But there was a line that was slipped in — almost in an ‘oh, by the way’ manner, that may have larger implications.

He said the government would take forward the process of transforming IDBI Bank and consider the option of reducing its stake in the lender to below 50 per cent.

Although it is worded in a manner as to provide deniability or retreat in the teeth of possible opposition, that statement is a first — in terms of being ready to take government stake below 50 per cent and change the ‘public sector’ character of IDBI Bank.

Sometime later, based on this experience, others may follow.

Perhaps, the ball will now move to the RBI Governor’s court.

He will be expected to deliver his side of the bargain and provide a vote of confidence through another hefty cut — perhaps a 50-basis-point cut instead of the token 25 bps. That would demonstrate that the RBI believes the Budget numbers are credible and is working in tandem with the government to push growth back to higher levels.