As ﬁscal year 2017–18 drew to a close, the Government of India decided to bite the bullet and implement a proposal to “resolve” what was being presented as one of the leading challenges then facing the Indian economy: large non-performing assets (NPAs) on the books of the banks, especially the public sector banks (PSBs).The Recapitalisation plan, ﬁrst announced in October 2017, involved infusing ‘2.11 lakh crore of new equity into the PSBs, of which ‘1,35,000 crore would be new money from the government, ﬁnanced with recapitalisation bonds. Another ‘18,139 crore was the balance due under the ‘70,000 crore Indradhanush plan initiated in August 2015 and funded from the government’s budget. The remaining ‘57,861 crore was to be mobilised by the banks from the market. The plan was to clean up the books of the banks to a signiﬁcant extent, enabling them to adhere to the Reserve Bank of India’s (RBI) voluntary decision to get banks to meet Basel III-type capital adequacy norms by 2019.
If corporate borrowers are let off the hook and losses of the banks are re-capitalised with resources from the budget, then private losses are clearly being socialised, since their burden is being transferred to those paying direct and indirect taxes today or in the future. This has been under way for some time now. Between 2000–01 and 2014–15, budgetary allocations for re-capitalisation of banks totalled `81,200 crore. Much of this was provided for in recent years, with as much as ‘58,600 crore (or 72% of the total) announced during just four consecutive years ending 2013–14. However, the government seemed to have lost the appetite for such re-capitalisation. Even when it was seen as unavoidable, allocations from the budget for the purpose were short of what was promised, and what was promised was short of what was required. In 2014–15, while ‘11,200 crore was allocated for the purpose in the budget, actual capital infusion into PSBs was just ‘6,990 crore. Then in 2015–16 there was a revival, despite the initial reduction of even the budgetary allocation for the purpose to ‘7,940 crore. In the course of the year, the government announced a four year Indradhanush plan, under which the PSBs would be provided with new capital worth ‘70,000 crore, with ‘25,000 crore being disbursed that ﬁ nancial year and the next, and ‘10,000 crore in each of the two subsequent years. In its most recent avatar, the recapitalisation exercise is the `2.11 lakh crore plan announced in October 2017.
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(This article was originally posted in the Economic and Political Weekly on March 31, 2018.)