Wednesday, August 5, 2020
Home Opinions Bank Recapitalization - sorting the myths from the facts

Bank Recapitalization – sorting the myths from the facts

BIG BUSINESS BAILOUT!! TAX PAYER MONEY!! ADANI AMBANI, NPAs!! Etc etc etc screamed the Twitter liberal circle. On the other hand a section of dolts kept saying “we need reforms”. This is not enough. Need to do more. A golden chance to correct errors is being missed. Etc etc etc..

Its not quite clear what these people intend to say. Anyway I shall keep that for some other day. Let us focus on the Bank Recapitalization part for now. I shall try and explain the whole activity in as many simple terms as possible.

What is Capital Adequacy Ratio (CAR)/(CRAR):

A bank cannot keep on lending. There are certain limits to it. These limits are set to protect depositors like you and me and to promote a stable and efficient financial system. Thus the capital “adequacy” ratio, as the name suggests, is a measure of a “bank’s capital.” It is expressed as a percentage of a bank’s risk weighted credit exposures or in simpler terms its “loans”. CAR is also known as Capital to Risk (Weighted) Assets Ratio (CRAR)

So What was the problem with CRAR?

Indiscriminate Lending under UPA government!!

This chart explains how loan portfolio of banks increased manifold. There were certainly few allegations that loans were issued on phone calls and under influence from top politicians. Some of the practices from then are captured in Vijay Mallya’s saga. Anyway, this lending led to an increase in NPA’s. If you lend to an unviable project, it cannot service the debt! This is precisely what happened. As on today the total banking NPAs have crossed Rs 8 lakh crore in the quarter ended June 2017, 90% of which are from public sector banks.

When an account is declared “NPA” banks have to mandatorily make “provisions” for bad loans in their books which leaves them with even lesser money to lend further and very badly affects their profitability and capital adequacy.

So tell me who is to be blamed for this situation? The people under who’s tenure the loans were given or the people who are trying to fix the rot?

This indiscriminate lending has resulted in six banks having been put under the “prompt corrective action” category by the Reserve Bank of India. This means that their activities like announcing dividend, opening branches, hiring and giving further loans to below investment grade rated entities are restricted. In fact the headlines should read how UPA nearly collapsed the banking system.

Banks had to cushion in a lot of provisions to cover up these loans. A graph issued by the Finance Ministry covers this aspect:

All in all, poor oversight by the UPA government over functioning of the Public Sector Banks, nearly collapsed our economy. The provisioning has eroded the capital adequacy ratio thereby hampering the ability of banks to lend fresh loans.

So why this “Capitalisation of Banks”

Capitalisation simply means infusing fresh capital with the banks. This time the government is planning to issue “Capitalisation bonds” to raise funds. Here is one of the ways it can be done:

Government issues bonds. Banks subscribe to bonds. Government gets funds. Government uses same funds to infuse into banks and thereby expanding their capital base. Thus improving CRAR. This allows banks to lend fresh loans and even allows them to raise even more funds from outsiders at cheaper rate.

These fresh loans generate productive assets, jobs and create demand. Demand drives the economy. The exact mechanism of these bonds has not been announced yet but it will come out in due course of time.

Who shall benefit out of this?

Anybody who is willing and eligible for a commercial loan from a bank shall benefit out of this. Banks, which are currently stressed and cannot lend much, will be freer to lend. They need eligible and good borrowers to keep the cycle running. The Finance Minstry highlighted that special focus shall be given on Mudra and Standup India loans once fresh capital is infused.

Are Tax Payers Bailing Out Banks?

The technical versions may say NO, but to put it bluntly: Yes. But we have to remember there is no other option. We are in a tight spot, and this could be the best out of bad options. Let anyone tell you otherwise, we cannot let our banks die.

Are Tax Payers bailing out the NPA accounts or big defaulters?

No. The proceedings under various laws are going on. The recovery proceedings against defaulters will not stop. There is a difference between bailing out a bank and an individual borrower. So no, you aren’t paying Vijay Mallya’s loan off.

What is the guarantee that future loans will not go bad?

True. There is no guarantee. They may also go the same way. For that systemic reforms have been taken by this government. Here is a glimpse of the same.

Lending based on sound principles will ensure lesser NPA’s. Bank Boards and credit appraisal system have been revamped. Insolvency and Bankruptcy code has been enacted. State Bank Group has been consolidated. MOUs with 11 Public Sector Banks have been signed to ensure a turnaround. None of this was done by the UPA. It was done under the Modi Government.

Conclusion

Instead of following views of some policy wonks and copy-paste “economists” on twitter, listen to what experts have to say. There is no denying that Banks today are not in the best of shape. There is also no denying that most of the loans which are causing troubles, were extended during the UPA regime. The current Government is essentially cleaning up the mess of the previous Government, and as you know, in any clean-up, hands will get dirty. The public at large needs to only ensure that even after this clean up, Banks do not go back to their old ways of lending. Stricter norms for loan appraisal need to be enforced and the Government must ensure that we do not see a repeat of the crisis.

Post Script

If you are a Raghuram Rajan fan and are wondering “what would he have done”, read this:

“I think it’s important to recognize that banks do need capital and you need to put it aside and if it means that there are other resources allocations that should be reduced, so be it. I mean, that’s the cost of staying within the budget. This is not painless,”

  Support Us  

Whether NDTV or 'The Wire', they never have to worry about funds. In name of saving democracy, they get money from various sources. We need your support to fight them. Please contribute whatever you can afford

Ashutosh Muglikar
Articles on Corporate Laws, Policy, Economics and Politics. Maverick. Lover of Ideas. Slayer of Hoaxes.

Trending now

Islamists, ‘liberals’ attack cricketer Mohammad Kaif for urging haters to not spew venom over Ram Mandir in Ayodhya

Mohammad Kaif was attacked by Islamists for urging people who were spewing venom over the Bhoomi Pujan to spread the message of love and dignity instead.

Families of Kar Sevaks burnt alive in Godhra welcome the construction of Ram Mandir in Ayodhya

The relatives of the victims and those who survived the blaze in Godhra claim that their sacrifice have finally borne fruits

Islamists trend ‘#ReturnBabriLandToMuslims’ and ‘#BabriZindaHai’ on the day of Ram Mandir Bhoomi Pujan

Well, one feels bad to see these radical Islamists so perturbed, but, the absoluteness of the Ram Mandir is undisputable

Live: Prime Minister Modi does Bhoomi Pujan of Bhavya Ram Mandir at Ayodhya

Prime Minister Narendra Modi to lay the foundation of the Ram Mandir at Ayodhya on 5th August 2020

Watch: Footage from November 1990 when Mulayam Singh Yadav ordered firing upon Karsevaks with casualties believed to be in hundreds

Mulayam Singh Yadav as the Chief Minister of Uttar Pradesh ordered firing upon the Karsevaks who had gathered at Ayodhya.

Signs of time to come? Union Law Minister RS Prasad shares image of Constitution of India first drafted by Dr BR Ambedkar with Lord...

RS Prasad, Union Minister of Law and Justice, on Wednesday took to Twitter to share an image of the Constitution of India originally drafted by Dr BR Ambedkar with sketch of Lord Ram on it.

Recently Popular

Here is why #BabyPenguin is trending on Twitter, and why Aaditya Thackeray is called so by some

Yuva Sena registered complaint against twitter user for calling Aaditya Thackeray "Baby Penguin" and Uddhav Thackeray "Aurangzeb"

How one call from Chief Minister Narendra Damodardas Modi changed my views from ‘Why Ram Mandir’ to ‘Mandir Wahin Banayenge’

As we get closer to the dream of Bhavya Ram Mandir coming true, my perception of importance of the Ram Mandir underwent a transformation

“Will believe in coronavirus if Amit Shah dies”: Shaheen Bagh ‘activist’ Aiman Rizwi urges Muslims to pray for his death

Rizwi also strongly believes that Coronavirus is a myth and propagated to conceal failures of Modi government.

Filmmaker Ram Gopal Varma has a prolonged meltdown, announces a movie on Arnab Goswami, “Arnab, The News Prostitute”

Ram Gopal Varma vented his spleen against the Republic TV Editor-in-Chief in a series of tweets on Twitter.

NASDAQ billboard at NYC’s Times Square not to beam Lord Ram’s image after petitions by Muslim groups

Muslims groups in New York have objetected to the plan of displaying the images of Lord Ram on the large LED screens of Times Square on Bhoomi Pujan day.

Why it’s wrong to call Aatish Taseer a ‘bastard’ even if he is one

All Amit Shah ever did to Taseer was revoke a privilege that allowed him to circumvent the usual visa application process that common people go through.

Islamists, ‘liberals’ attack cricketer Mohammad Kaif for urging haters to not spew venom over Ram Mandir in Ayodhya

Mohammad Kaif was attacked by Islamists for urging people who were spewing venom over the Bhoomi Pujan to spread the message of love and dignity instead.

Sushant Singh Rajput case: Center accepts Bihar Police request for CBI enquiry, SC refuses interim relief for Rhea Chakraborty

Centre informed Supreme Court that the it has accepted Bihar govt's request for CBI inquiry into Sushant Singh Rajput death case

Families of Kar Sevaks burnt alive in Godhra welcome the construction of Ram Mandir in Ayodhya

The relatives of the victims and those who survived the blaze in Godhra claim that their sacrifice have finally borne fruits

Islamists trend ‘#ReturnBabriLandToMuslims’ and ‘#BabriZindaHai’ on the day of Ram Mandir Bhoomi Pujan

Well, one feels bad to see these radical Islamists so perturbed, but, the absoluteness of the Ram Mandir is undisputable

Live: Prime Minister Modi does Bhoomi Pujan of Bhavya Ram Mandir at Ayodhya

Prime Minister Narendra Modi to lay the foundation of the Ram Mandir at Ayodhya on 5th August 2020

Bhoomi Pujan for Ram Mandir in Ayodhya brings closure for a sister who had lost her brothers Ram and Sharad Kothari for the cause...

Ram and Sharad Kothari were killed in police firing ordered by the former UP CM Mulayam Singh in November 1990.

On the historic day of Ram Mandir Bhoomi Pujan, Islamists suffer a meltdown

Rana Ayyub and Arfa stated that it is not the country they knew and they do not recognise it anymore.

Was Narsimha Rao complicit in the demolition of Babri Masjid by Karsevaks? His personal doctor doesn’t think so

His detractors within the Congress party claim PV Narasimha Rao was complicit in the Babri Masjid Demolition.

Ram Mandir Bhoomi Pujan: Asaduddin Owaisi hallucinates, claims demolished disputed structure is ‘alive’

Asaduddin Owaisi has been venting out his anger in Congress leaders too, for supporting the Ram Mandir.

Watch: Footage from November 1990 when Mulayam Singh Yadav ordered firing upon Karsevaks with casualties believed to be in hundreds

Mulayam Singh Yadav as the Chief Minister of Uttar Pradesh ordered firing upon the Karsevaks who had gathered at Ayodhya.

Related Articles

Connect with us

238,934FansLike
421,800FollowersFollow
289,000SubscribersSubscribe