The Finance Ministry may find itself answering some tough questions on recapitalising of PSU banks if the Comptroller and Auditor General of India (CAG) has its way.

This is not the first time that the government auditor has wanted to look into the issue of recapitalisation of PSU banks. Internally, CAG has been raising this question on whether this financial aid from the government should be seen as a grant to PSU banks and not treated as it is today. But with banks coming under the purview of the Reserve Bank of India, the CAG was unsure of its locus standi . Now, it realises it can do this scrutiny when auditing the accounts of the Finance Ministry.

The auditor would also like to know if the money given to these banks as part of recapitalisation has been utilised correctly. As the CAG works out its plans for 2020-21 audit proposals, incumbent CAG Rajiv Mehrishi, who has also served as Union Finance and Home Secretary before he became the nation’s top auditor, holds the view that the CAG needs to expand its scope.

“The subject of audit needs to change with changing times. New topics and areas need to be explored. We have prepared a fresh list of audits for the current fiscal (2020-21),” he told BusinessLine. Though the topics for 2020-21 audits have been approved, it remains to be seen how many will take off, as Mehrishi demits office this week.

 

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Pumping money via bonds

The government has infused ₹2.6-lakh crore into PSU banks over the past three fiscal years. In a marked deviation from the past trend, when the government infused capital into PSU banks from its kitty (essentially taxpayers’ money), since fiscal 2018, the Centre has been re-funding them via recapitalisation bonds owing to its weak finances. The money raised through issue of recap bonds (subscribed to by PSU banks) is pumped in as capital into PSBs (hence, not counted under the fiscal deficit calculation).

In effect, with a bit of financial jugglery, banks’ liability (deposits) gets converted into capital. Three years since not only has the Centre’s massive recap plan achieved little (by way of strengthening banks’ balance sheets) but has also raised concerns about the government throwing good taxpayers’ money into weak banks.

Besides, it has made it a herculean task for the government to divest its stake in PSBs. The massive capital infusion over the past three years has led to the government’s stake in many of the PSBs at 90 per cent and over.

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