Dinesh Kamath's Editorial 'Attempt to give relief to the banks' that was published in Newsband

Attempt to give relief to the banks

The banks’ recapitalisation plan is good idea, but funds must be distributed prudently. The government has come up with this move considering the fact that there are just months to go for the general election. The Centre is thinking of infusing an additional ₹41,000 crore into public sector banks. This will take the total planned funds infusion into banks this year to ₹83,000 crore.

The latest fund infusion will help a number of public sector banks to climb out of the Reserve Bank of India’s Prompt Corrective Action (PCA) framework. The government is obviously keen to free up the banks from restrictions on lending. But it flies counter to the RBI’s basic objective in keeping these banks under the PCA framework, which is to nurse them back to good health.

The government should not apportion extra capital to these weak banks instead of supporting the ones that are on the recovery path. While the idea of infusing more money into banks is not bad per se, given that they are grappling with inadequate capital, a lot depends on how and to which banks this money is distributed.

PSU bank unions had called strike on December 21. It will observe strike also on December 26. The strike call given by the All India Bank Officers’ Confederation (AIBOC) expected to hit banking operations across the country. However, private sector banks would continue their usual business as they are not part of the strike. AIBOC joint general secretary Ravinder Gupta said that they have demanded wage revision based on the minimum wages formula without linking to profits or paying capacity. Besides, the union has also opposed the proposed merger Bank of Baroda, Dena Bank and Vijaya Bank.

As far as on line banking and ATMs are concerned, bank employees are being sidelined and this strike will prove it. If they think that they can disrupt they are in for a shock.

Anyway, the government proposal in Parliament for an additional ₹41,000 crore to recapitalise public sector banks, over and above the already budgeted ₹65,000 crore, if approved by the House, this would take the total recapitalisation package for the current financial year to ₹1,06,000 crore, of which the government plans to utilise ₹83,000 crore over the remaining portion of the year.

The government aims at four broad categories. The first is to help banks meet the regulatory capital norms. The second is aimed at helping banks currently under the Prompt Corrective Action (PCA) framework to come out of it by improving their capital. The third category of banks to receive capital would be the non-PCA banks that are in danger of crossing the threshold into the PCA framework. The fourth would be to provide regulatory and growth capital to banks that are undergoing mergers, such as Vijaya Bank, Dena Bank, and the Bank of Baroda, which are to be merged into a single entity.

The best thing is that whichever PCA banks have shown performance in terms of reduction of net NPAs to 6% and improvement in return on assets will be given capital. The names of these banks are yet to be decided. There were some banks that did not need the additional capital as they were on a healthy base. These include State Bank of India, Bank of Baroda, Indian Bank, and Vijaya Bank. Punjab National Bank is in breach of the PCA benchmark, so it is a likely candidate for additional funds.

The recognition of NPAs, a process which started in 2015, has made considerable headway and is almost complete. The last quarter has shown that there is an improved performance, and the downward slide in the NPAs would commence.