Banks NPAs & Recapitalisation

  

  Banks NPA's & NPA Ratios in June 2017

• As in June 2017, Banks NPAs are Rs.829,338 crores and NPA ratio is any where up to 24%. As on date  NPAs are in excess of  Rs.11,00,000 crores.
• Steadying a tottering financial system is never a graceful exercise, as American and European authorities discovered after the financial crisis. Without reform, another recapitalization is meaningless.
• The recently announced Rs.211,000 crores Banks Recapitalisation by central govt has three components:
  (i)   Budgetary support Rs.18,000 crores only.
  (ii)  PSU banks will need to go raise Rs. 58,000 crore from the market. Who will buy? May be cash rich public sector industries will be coerced to buy them. 
  (iii) The government will issue “Bank Recapitalization Bonds” for Rs. 1,35,000 crore which will be used to buy more shares in public sector banks. But these have to bought by the banks themselves. All these bonds have to be paid back in the future along with the interest by the central government. In effect, nation's future money is being pumped into today's banks recapitalisation.
• Effectively all 21 ailing banks will get additional cash of Rs.76,000 crores only, in next two years.
• Despite the roundabout method of recapitalisation, getting money into the banking system is a good policy. Having fresh equity makes it easier for them to acknowledge past mistakes and move on. Govt need to pump in ~Rs.75,000 crores every year over next few years from budget to make PSU banks vibrant.
• But every NPA has to be booked entirely by from Bank's equity only. Writing off NPAs will result in capital erosion to that extent. NPAs exceeding 10% will erode equity completely.
• Public sector banks have frozen up on lending because their capital to loan ratios will not allow any more.
• Since banks needs to have 10% of every loan from its equity, larger equity base will be helpful to some extent in resuming lending business.
• But banks recapitalisation helps adequate equity in books to resume lending of consumer deposit money.
• Any deposits withdrawal run by public will be disastrous for banks, with inadequate cash and massive deposits to service.
• But the banks lending money to its promoter (government) by buying bonds for funding additional equity acquisition of the same bank might be legal but is grossly unethical.
• With 80% NPAs irrecoverable, Banks would never initiate hard steps for recovery of these NPAs with massive haircuts contracting their equity.
• But when will they earn profits and cover up irrecoverable NPAs? With reforms and tight future lending and banks managed professionally without political influences and temptation of corruption, it would easily take over 10 years. Until then it is just hollow talk only.
• This Banks Recapitalisation exercise (equal to 1% GDP) may not increase fiscal deficit in  books, but will damage economy the way its corresponding fiscal deficit would have done or even more. 
• The best way and the only way is that banks take over NPA companies and liquidate them in auction and book losses. With what ever is left out they should draw their operations afresh and move on carefully. Any other way will be round about and postponing eventualities, achieves nothing and wastage of time & money.
• While national debt may create some assets, it also means that the present government is creating liabilities for unborn citizens reducing their ability to produce and makes them poorer.

Banks NPA situation was equally bad and needed recapitalisation ever since Modi became PM 3+ years ago. Instead of doing the right things for vibrant economy, Modi focused on vanity and spectacularity of new schemes and none of them have done any good for the economy. In fact reckless reforms like Demonetisation & GST have destroyed all sectors of economy. The only way our economy can grow and stabilise is with improving agriculture viability that enables rural spending and consumption and support the economy. But Modi & Jaitley are known for their tinkering the economy with disastrous effects only. Today, public deposits in banks in excess of Rs.1 lakh per customer are highly unsafe with RBI insurance covering up to Rs.1 lakh only!