Beyond recapitalisation

The Union government has sought Parliament’s approval to incur an additional expenditure of ~1.67 trillion in the current fiscal year. The supplementary grants will be used to fight the pandemic, increase allocations under various welfare schemes, and recapitalise public-sector banks (PSBS). The government intends to infuse ~20,000 crore through recapitalisation bonds into PSBS. In the given situation, when non-performing assets (NPAS) are likely to increase significantly, PSBS would require more capital. Gross NPAS in PSBS, according to the Reserve Bank of India (RBI), are expected to increase to over 15 per cent by the end of the current fiscal year. Further, infusing capital would not address the central problem PSBS face, since it is not accompanied by governance and operational reforms. The government has infused over ~3 trillion into PSBS over the last few years and, in spite of that, the demand for more recapitalisation has been on the rise.

To be sure, the pandemic has increased difficulties for banks, including PSBS, and things could get more complicated with ill-advised interventions. The Union government has set up an expert committee, led by former Comptroller and Auditor General Rajiv Mehrishi, to study the potential impact of waiving interest and interest on interest for the Covid-related moratorium period on the economy and financial stability. Some borrowers had approached the Supreme Court for relief due to the ongoing economic hardship. The court, which will resume the hearing on September 28, had noted that it was keen on waiving the interest on interest for the moratorium period. It is likely that the decision would depend on the government’s view and the recommendations of the Mehrishi committee. The committee is also expected to address the impact of interest waiver on lending institutions. The RBI had earlier submitted that any waiver of interest on loans would affect the viability of the financial sector. According to the banking regulator, banks could lose interest worth about ~2 trillion if a waiver is granted for six months.

It is correct that a large number of households and businesses have been affected by the pandemic-induced lockdown and need relief in terms of debt repayment. Both the RBI and banks are working in this area and should be allowed to do so simply because they are in the best positions to take such decisions. A blanket waiver would do more harm than good. Since the waiver will affect banks’ income, the relief would come essentially at the cost of shareholders, including the government, which will need to put more capital in PSBS. The government finances are already stretched, and it is not in a position to keep recapitalising PSBS.

A weaker banking system would not be able to extend credit to the productive sectors of the economy and this would affect recovery. Further, waiving interest for one set of borrowers would be unfair to those who are servicing their loans. At a broader level, it is important to recognise that the banking system or the regulator cannot protect all borrowers and this should not even be attempted. Banks are financial intermediaries and denying what is due to them would affect the basic architecture of the financial system. This will also increase risks to financial stability. Thus, both the government and the court would be well-advised to allow the banking regulator to take decisions in this context as it is also responsible for maintaining financial stability.