Bank Recapitalization: Will it restore faith in Banking Industry?

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Bank Recapitalization: Will it restore faith in Banking Industry?

Government goes on recapitalizing the public sector banks and these banks working on public money throw away thousands of crores by giving them to those who never intend to repay. The large fish remain at large while small borrowers and the staffs bear the brunt of customers losing trust in the bank’s working.


This solved WAT topic which making rounds in IIMs and other top MBA colleges, will help you to get important inputs for your WAT round with a clarity on how to write in WAT with facts and figures to make your small essay more effective and get an edge over your peers.


Key facts about PSBs: Know and use appropriately

There are 21 Public Sector Banks which are the state-owned banks in India. Public sector banks account for 70 percent of total banking assets in India. The ‘lack of dynamism’ in banking practices at the bank level and at the Finance Ministry level to control judiciously the flow of finance and recovery system to stop an account from turning into NPA, keeps these Public Sector Banks starved of funds and crying for more capital infusion every now and then.    


Since the government has a majority stake in Public Sector Banks, it has to inject capital through the Recapitalization in these banks. Government of India will infuse 2.11 lakh crores in the Public Sector Banks towards recapitalization. Government proposes to issue Recapitalization bonds, raise equity from the market and make budgetary allocation.


Why the Recapitalization needed?
Most of the PSBs have huge stocks of non-performing loans on their balance sheets.  As of June 2017, the NPAs of the banking system were as high as 10.2 % of the loans advanced by the banks. This ratio increased to 12.2% by the end of September 2017.


The volume of bad debt hit 9.46 trillion rupees at the end of half of financial year 2017 in September 2017. Out of this the share of public sector banks is 8.25 trillion rupees in the pile of bad loans. The banks' deteriorating balance sheets have limited their ability to lend, and that has affected the bank credit growth in India.


The bank credit growth in the year 2016-17 was 5.1 %, which is the lowest since 1951. Hence, a massive recapitalisation was deemed as necessary to clean up the balance sheet of the banks.


PSBs are capital constrained as the bad loans have hit their capital ratios due to provisions for NPAs and due to higher risk weights of bad loans. 


An ongoing bad debt problem in India has been running since 2012 when banks expanded lending at a fast pace, including to a number of problem sectors such as telecommunications and mining.


All this and more have added to losing trust of common people in the public sector banks while the rich ones are usurping the Banks’ money in connivance with top brass of these banks and the lower and middle level staff is made the scapegoat for the misdeeds of the higher ones against whom there may or may not be a proof.


Rs.2.11 Lakh crores Recapitalization: Not a small amount
At the cost of public money collected by the Government in the form of taxes or from borrowing from various sources, the Government has proposed the recapitalisation of banks worth 2.11 lakh crores which is to be done in following manner

  • Budgetary allocations: Rs. 18000 crore
  • Issue of equity shares by banks in the market: Rs.58000 crore
  • Issue of Recapitalisation bonds by the Government: 1.35 lakh crore

Banks declare higher losses after Recapitalization announcement
If this recapitalization can take these banks to higher levels of performance, it may be rated very timely step. However, immediately after the announcement of recapitalization, the banks have declared higher losses as the recapitalized amount would be available for more adjustments and to bring down the banks back on the pre-capitalization level.


Despite the recapitalization with the thousands of crores of public money infused in it, to revive the asset quality, country’s biggest lender State Bank of India (SBI) on Friday February 9, 2018 posted a standalone net loss of Rs 2,416.37 crore for quarter ended December 31, 2017 against a net profit of Rs 2,610 crore in the corresponding quarter last year.


Provisions and contingencies figures increased 111 per cent year-on-year to Rs 18876.21 crore for the quarter under review against Rs 8,942.83 crore in the same period last year.   


Gross non-performing assets (NPAs) in absolute terms stood at Rs 1.99 lakh crore in Q3FY18 over Rs 1.86 lakh crore in Q2FY18 and Rs 1.08 lakh crore in Q3FY17. Provision coverage ratio as on December 31, 2017 stood at 65.92 per cent. 


Net interest income of the lender jumped 26.88 per cent year-on-year to Rs 18,687.57 crore in Q3FY18. 

Asset quality of SBI deteriorated during the quarter gone by as percentage of gross non-performance assets (NPA) came at 10.35 per cent in Q3FY18 against 9.83 per cent in the sequential quarter ended September 30, 2017. Percentage of net NPAs increased to 5.61 per cent vs 5.43 per cent QoQ. 


Shares of the the largest bank of India – SBI closed 1.68 per cent down at Rs 296.40 on Friday February 9, 2018


Growing NPAs to swallow the Recapitalization
These commercial banks have to indulge in various types of loss making finances where the recovery is either very low or there is no recovery. Even the principal amount is not returned by the borrowers and this gives rise in consistent increase of Non-Performing Assets (NPAs) resulting in loss of public trust on banking mechanism.


These lending could be as per the directives of Government of India, classified as priority sector lending or could be big commercial finances like that of Kingfisher of Vijay Mallya, Gitanjali Gems & 23 other companies associated to Nirav Modi and Mehul Choksi, Rotomac run by Vikram Kothari among others.


These big and influential business magnets have swallowed thousands of crores of banking system and have run away. On the top of it they threat the Indian Banking system not to repay. All these factors make already fund starved banking industry cry for more capital.


Depleting capital Adequacy below 8%
Banks have to follow BASEL-3 norms. These are the international banking regulations that have to be followed by the banks in all countries. According to it, the banks have to maintain a capital-adequacy ratio of at least 8 %. The capital-adequacy ratio is the ratio of capital to the risk-weighted assets (loans etc) . Hence, more capital is required to be able to give more loans.


Rs.88,139 crore Recapitalization by March 31, 2018  
The government will infuse Rs. 88,139 crore capital in Public Sector Banks (PSBs) before March 31 to boost lending and to revive growth. This is part of the Rs.2.11 lakh crore bank recapitalisation plan announced in October 2017 last year.


Government also proposes to recapitalize the banks if they are ready to implement a series of reforms to get the funds, including improving their due diligence, allowing specialised monitoring for loans above Rs.250 crore, and limiting the number of lenders that can group together to dole out loans.


Biggest Recapitalization for PSBs in Banking history
This is not the first time that the bank recapitalisation bond will be issued in India. According to the data by Bloomberg, in the year 1994, India had sold about 48 billion rupees of 12-year recapitalisation bonds at a coupon rate of 10%. 


Despite using the taxpayer's money to get these public sector banks out of the financial crisis earlier also, the recapitalization of Rs.2.11 lakh crores to PSBs proposed now, is the largest till date.


Since tackling the root of the banking system's problems is the government's top priority to avoid another acceleration of bad loans, the huge funding may not be avoided.


Recapitalization in past
Life Insurance Corporation and Government of India despite having high stake in the public sector banks have not been able to put a required check on these banks. As a result more than 3lakh 60 thousand crores have been infused in these banks in the name of recapitalization during last 25 years.


How to win the trust of people

These PSBs are gradually losing faith of the people on various counts as they are not able to keep the money and valuables of the customers secure enough. Their strong rooms are vulnerable and lockers are breakable because of which people find it difficult to safe keep their valuable articles with these banks. Thefts are committed and money is never recovered marking a question mark on the security.


While small borrower find it difficult to borrow money for small start ups, the cheats make away with the booty of thousand crores and banks are unable to do any thing.


The only way to win the faith of people is that all these public sector banks should come out with stringent practices to avoid recurrence of such large scale losses, NPAs, and instead offer good returns to the small savings and put them to safe lendings. Instead of writing off the debts, the tough recovery process can win the trust of depositors whose money is used for lending by the banks. This will avoid the requirement of recapitalization and will increase their profit margin.    

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