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    PM Modi’s PSU bank spends beat 45 years’ investments

    Agencies

    Story outline

    • The government has been forced to infuse funds after PSU banks reported collective losses from FY16 to FY19 totalling Rs 1,64,474 crore
    • These losses put pressure on government finances at multiple levels as the Centre lost out on dividends and tax revenue
    While the bulk of the capital infusion came under the NDA II government, the maximum number of bank-delivered social schemes were also announced under this regime.
    (This story originally appeared in on Jul 17, 2019)
    MUMBAI: In the 50 years since banks were nationalised, the recapitalisation bill from FY18 to FY20 at Rs 2.69 lakh crore has been higher than in the first 45 years — estimated to be less than Rs 1.5 lakh crore. In the last 10 years, the government has been consistently capitalising public sector banks (PSBs) with Rs 3.8 lakh crore between FY11 and FY20. This does not include the Rs 20,000-odd crore that Life Insurance Corporation has paid for acquiring 51% stake in IDBI Bank.

    The government has been forced to infuse funds after PSU banks reported collective losses from FY16 to FY19 totalling Rs 1,64,474 crore. These losses put pressure on government finances at multiple levels as the Centre lost out on dividends and tax revenue.

    While the bulk of the capital infusion came under the NDA II government, the maximum number of bank-delivered social schemes were also announced under this regime. These include Jan-Dhan Yojana, Pradhan Mantri Jeevan Jyoti Bima Yojana, Pradhan Mantri Suraksha Bima Yojana and Pradhan Mantri Atal Pension Yojana.

    Although banks were first nationalised in July 1969 with a second round of nationalisation in 1980, the capital requirement was felt only in the mid-90s. Liberalisation of the economy and financial sector reforms resulted in the RBI adopting global prudential norms for banks.



    As a result, immediately after reforms in 1992-93, the profitability of the PSBs as a group turned negative with 12 nationalised banks reporting net losses. Besides recognising bad loans (which triggered the losses), the RBI has also set a deadline of March 1996 for attaining a capital adequacy ratio of 85. With eight banks missing the deadline, the Centre was forced to infuse capital.

    After the financial sector reforms, the government ended up spending Rs 20,446 crore in bank capitalisation in the 1990s to enable them to meet global capital standards. The subsequent decade saw banks being net contributors to the government as easing interest rates, capital-raising through listings and a growing economy helped PSBs book record profits.

    The latest round of recapitalisation has been triggered by former RBI governor Urjit Patel’s move to clean up PSU banks by scrapping all loan-restructuring schemes and forcing banks to recognise stressed loans as default. However, despite recapitalisation, banks have been losing marketshare to private banks. This is reflected in the market cap of PSU banks, which is only Rs 6 lakh crore as against Rs 17.16 lakh crore for private banks.

    In 2014, the RBI had appointed a committee headed by former Axis Bank chairman P J Nayak to review governance of boards of banks in India. The Nayak committee had pointed out that — given the lower productivity, steep erosion in asset quality and demonstrated uncompetitiveness of PSBs over varying time periods — the recapitalisation of these banks will impose significant fiscal costs. The committee had said that unless the governance of PSBs improves, it would impede fiscal consolidation, affect fiscal stability and eventually impinge on the government’s solvency.

    “Consequently, the government has two options: Either to privatise these banks and allow their future solvency to be subject to market competition, including through mergers; or to design a radically new governance structure for these banks in order that repeated claims for capital support from the government, unconnected with market returns, are avoided,” the report said

    (Catch all the Business News, Breaking News Events and Latest News Updates on The Economic Times.)

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    2 Comments on this Story

    Rohan 381 days ago
    just like people unnecessarily feared on Note Bandi and GST LoL
    Jayaraman Raju383 days ago
    the annual rise of defaults is disturbing; probably the govt had no idea about the banking system, per se; the govt appoints its chosen few, on the boards of the banks, and RBI sends its representatives to the boards of these banks; apart from these there are people --- who are deemed to be honourable and knowledgeable and of high integrity; in fact we also had representatives of unions ---employees and the officers on the board; these are the people who are privy to the proceedings of the boards of the banks and many would have put their signatures to the financial statements of the banks; then tell me, how the accounts have gone into default without the knowledge of the govt or rbi? now the govt is acting innocent and says it is trying to rectify the situation to keep the banks afloat; what is this nonsense? why should the govt put good money after bad money? simply treat the overdues as it treats the loss on a national calamity and be done with the sham of pumping funds year after year; so the people''s money is being used to cover up the losses due to frauds committed by the bank-directors, corporate world, rbi reps and men of great integrity; the money had already been taken away fraudulently which we are replenishing year after year; the govt should stop milking the banks for its funds-requirements like financing its bonds, schemes and other development schemes; banks, including rbi should not be forced to finance the govt schemes,instead it should save from the revenue;
    The Economic Times