Recapitalise banks and unchain them

Not unlike the periodic debt relief to farmers, we have to come to terms with the provision of equally large sums as relief to distressed bankers, er…sorry, to banks. When bankers lend irresponsibly under pressure from the political masters without proper due diligence, the effect is the same: banks can go kaput, just as farmers face penury and worse due to a lost crop or a usurious money-lender. In neither case would the government undertake structural reforms to ensure that the problem of debt-stricken farmers and NPA-stricken banks does not recur at regular intervals. Band-aid solutions are no answer to the crisis but, unfortunately, ruling politicians of all stripes cannot bring themselves up to see beyond the next election.

Modi was one politician who did start out well as prime minister with all the right intentions to break the mould of cheap giveaways and a reckless management of the public purse. Endemic problems in the banking sector has dogged the country for decades, with the crisis acquiring a particularly sharp edge when Indira Gandhi nationalised 14 big banks in 1969 for political reasons. Space does not permit to list all the steps the Modi government has taken to reorder things in a more systematic manner with an effort to weed out wasteful subsidies and expenditures and to ensure that the targeted groups actually receive the benefits. But, alas, Modi too strayed from the path of economic prudence some weeks ago when, following the sharp rise in the global fuel prices, which mercifully are back to tolerable levels again, he cut the retail price of petrol and diesel and also obliged the oil marketing companies to bear an equal burden. It was the first big concession to populism. Since then, the floodgates seem to have opened, with the recent electoral losses in the states, and a general election looming large on the political horizon. It has instigated a wave of competitive debt write-offs for farmers. Now, any hope of the government undertaking structural reforms in the agri sector must await till after the next Lok Sabha poll, and that too only in case Modi wins another five-year term.

Meanwhile, in the banking sector the price of gross mismanagement and reckless lending, particularly between 2008- 13, is still being paid. Last week, the centre sought Parliament’s nod to infuse another Rs 42,000 crore into the public sector banks (PSB). This would take the total amount for recapitalisation of PSBs to Rs 83,000 crore. In the main, the eleven PSBs which were restrained by the central bank’s Prompt Corrective Action framework would now get the relief in order for them to be able to start lending yet again. The government is expected to ensure that the PCA–hit banks do not return to the old ways and that they follow prudent lending practices. Whether they will actually do so would depend on a number of factors, but it can be safely said that since the advent of the NDA government political pressure to direct lending by PSBs has more or less ended. It is also because the government discontinued the earlier practice of appointing political nominees on the board of PSBs who would invariably curry favour with the managements to lend to their own favourite parties.

Pressures, if any, to relax lending conditions on the eve of a parliamentary poll too ought to be resisted. Overall, the banking sector is once again ready to resume normal operations after the huge debt overhang from the 2008-13 period which had virtually emptied their treasuries. The gross non-performing assets of the banks at one time were over Rs 10 lakh crore but thanks to a recapitalisation plan these had been pared down to nearly Rs 4 lakh crore last year. Credit growth in the banking sector is now at a healthy 15 per cent, especially when extraneous factors no longer influence lending decisions. But the renewed wave of farm sector debt reliefs is bound to pressure the bottom-line of banks unless the government immediately compensates the affected banks. Recapitalisation of banks cannot be an unending exercise. For banks to be run on sound managerial lines, these need to be freed from day-to-day governmental control and assigned firm financial objectives the achievement of which must be incumbent on top professional managers. Autonomy is required to ensure that the banking sector is not forced into sickness yet again. And if farm sector write-offs cannot be avoided, at least banks should be protected against its downside.

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