The Centre’s decision to peg up its recapitalisation package for Public Sector Banks (PSBs) this fiscal by seeking supplementary grants of ₹41,000 crore from Parliament is a difficult one to fault, despite the strained state of the fisc. With the bad loan stockpile of PSBs barely diminishing and loan provisions eroding their capital adequacy, the government as promoter had little choice but to mount operations for their rescue. Leading PSBs command the lion’s share of domestic deposits and allowing their financial health to deteriorate poses risks to public confidence in the banking system as well. But it is the intent behind the latest recapitalisation package that raises questions.

Going by official statements, the key objective of this capital infusion exercise seems to be to help five of the 11 banks currently under RBI’s Prompt Corrective Action (PCA) framework exit this dispensation, and to keep others with precarious finances from entering it. The hope seems to be that with these PSBs kept out of the PCA, there will be no fetters on their ability to ‘support’ the economy by lending to riskier borrowers such as manufacturing MSMEs, real estate developers and NBFCs who have been complaining of a credit squeeze. But this is short-sighted and specious. For one, with the PCA banks still carrying mammoth bad loans and reporting losses, much of the capital infused now is bound to be absorbed by provisioning, leaving little over for new lending. Two, given that it was excessive risk-taking and inadequate collateral that got PCA banks into this soup in the first place, it would be fool-hardy for them to double down on their lending without fixing what is broken with their credit appraisal systems and governance structures. Three, total bank credit to the economy has grown at quite a brisk pace of 13 per cent this fiscal, with sectors such as trade, housing, services MSMEs and retail reporting strong credit offtake. This undermines the Centre’s claim that it is RBI’s PCA norms that are holding back a reviving economy.

In this backdrop, it would make sense for the Centre to use the bulk of its recapitalisation funds to strengthen non-PCA banks with sound financials which have made progress on governance reforms and demonstrated good credit discipline. It can economise on its infusions into the weakest banks by restructuring or merging them. But official statements that the stronger PSBs such as SBI, Bank of Baroda or Indian Bank do not need capital, offers little hope on this score. In the past, the NPA sagas of Indian PSBs have always ended by these banks growing out of their loan mess aided by generous taxpayer-funded bail-outs. The root causes of the problem — cronyism, mis-governance and lacklustre project and credit appraisal processes — have always been papered over in the anxiety to power up credit flow. It now appears as if this time will be no different.

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