Cleansing balance sheets of PSBs will give a big push to the corporate sector

The government’s decision to go ahead with the infusion of Rs 1.04 lakh crore into public sector banks will strengthen their ability to lend resources for industrial expansion, agriculture and services. Supplementary grants presented in the Lok Sabha by finance minister Arun Jaitley on Thursday provides for infusion of Rs 41,000 crore. This will be in addition to Rs 65,000 crore that has already been budgeted by the government.

This is the largest recapitalisation plan unfurled in Indian banking industry’s checkered history. And, another Rs 1,00,000 crore would be pumped in during 2019-20 as part of the budget for next fiscal to be presented on February 1. The exercise to cleanse the state-run Indian banks balance sheets, deal with sticky loans, make recoveries and resolve 9,000 cases through the Insolvency & Bankruptcy Code (IBC) and National Company Law Tribunal (NCLT) process will provide the big push for the financial and corporate sectors.

Resource constraints and tightrope walking by the government on meeting fiscal deficit targets had put a big question mark on making resources available for banks’ recapitalisation. That hurdle seems to have now been crossed following the presentation of demands for grants. These budgetary resources will now be available to banks before close of financial year, ie March 31, 2019. Gross non-performing assets (NPAs) that peaked in March 2018 at over Rs 10.8 lakh crore have seen a decline. Banks have had already reported NPAs recoveries of Rs 60,726 crore during the same period. Several banks may pull themselves out of RBI’s prompt corrective action (PCA) allowing them to make fresh lending in the market. For instance, the merger of Dena Bank, Syndicate Bank, Vijaya Bank and Bank of Baroda will show a healthier balance sheet.

Some banks facing restrictions in lending may just be able to meet RBI’s capital requirement norms. In fact, the next six months will be a very exciting phase for both the banking industry and Indian corporates seeking to start afresh. Several companies that have put on hold their expansion plans or greenfield ventures can now move ahead with gusto. In fact, the whole exercise will lay the foundation for 8 per cent plus growth that Niti Aayog has talked about in its latest document India @75.

Going forward, more mergers and acquisitions in the banking sector may have to be attempted for scale of operation internationally. Also, the government may have to consider divesting its stake in phases to below 49 per cent. On the other hand, boards of directors at top banks will have to celebrate the newfound freedom from political interference more responsibly.