Throwing good money after bad for PSBs’ sake

THE performance and intrinsic value of public sector banks (PSBs) continues to roil all those with a regulatory role over them. While the RBI regulates the banking sector as a whole, its remit over PSBs is not complete. The government, through the Union Finance Ministry and its department of financial services, exercises a degree of regulatory oversight over the PSBs. This complicates matters and as a result, PSBs are able to get away with a lot.

The RBI is not very happy with this. The last thing the RBI would want is some other entity sharing the policing of PSBs with it, but at the end of the day, it’s being left holding the baby and having to answer how well they are using the public funds injected into them. But this is precisely what seems to be happening.

According to a report in Business Standard, the Comptroller and Auditor General (CAG), which audits the use of public funds, has sought from the RBI details of the performance of PSBs in the last five years during which they have received recapitalisation funds.

Now, in the first place, it is doubtful if the RBI comes under the jurisdiction of the CAG. So, it would not be a surprise if the RBI refuses to part with the information sought. But if the jurisdictional issue is set aside and the CAG’s query is seen as simply a fact-finding exercise (as if to say, ‘do share with us if you have some information on this’), that leads us back to the duality that has been referred to above. In this vein, the CAG has also requested the RBI to share with the government the details of any relevant study that it might have undertaken.

For almost a decade, the PSBs’ share of incremental credit has been going down as also their share of total outstanding credit. Quite simply, the PSBs have been steadily losing market share. To shore them up and enable them to meet capital adequacy norms which are ultimately globally laid down, the government has been pumping in funds.

The obvious question is, are the government and ultimately the public getting adequate value for this expenditure of public funds. And this is no small sum. Over the five-year period referred to by the CAG, the government has infused Rs 3.6 lakh crore which works out to 1.75 per cent of the 2019-20 GDP.

If the recapitalisation has been put to good use, the government should be able to get a good value in the disinvestment process that it is set to undertake for several PSBs. Additionally, it is important to ask the question because another budget is round the corner and the PSBs’ capital needs will again make a pitch for budgetary support. One positive sign of turnaround is an improving gross NPA situation — the total value of sticky accounts. Over the last three years — 2018-20 — the gross NPA of public sectors banks has come down from Rs 8.96 lakh crore to Rs 6.8 lakh crore. This is the result of extensive write-off of bad loans along with the receipt of recapitalisation funds.

But looking forward, there is a catch. From the falling trend of the immediate past, we should not assume that the trend will continue into the coming year (2020-21). Financial 2021 is being traumatised by the pandemic, but with signs of economic recovery, the expectation is gaining ground that the bad loan situation of PSBs will continue to improve as it did in the previous years.

In fact, chances are that the numbers will show an improvement but the great irony is that those numbers will be misleading. This is because various reliefs which the RBI has announced will show the NPA numbers in a positive light, but they will, without beating round the bush, be somewhat misleading.

First, the RBI announced a six-month moratorium on repayment for all term loans. Then came the permission to do a one-time restructuring of Covid-19-linked stressed assets. These allowed banks not to call a spade a spade. Finally, the Supreme Court has stopped banks from declaring an account as an NPA if it was a standard asset till August 31. So, if the RBI decides to even part with some information on a fact-sharing basis, it can well say that things have been improving in the past three years and after the 2019-20 Covid-19 interregnum, things will continue to look better but that will not really amount to revealing the true picture.

So, we come back to the point where we started. Have the PSBs used their recapitalisation funds well? If so, then in the coming year, they will be able to expand their loan books at a faster pace. But despite nascent signs of economic recovery, prospects of business going to banks to loan more funds, particularly small and medium enterprises, remain low.

So, those seeking to invest in PSBs down the year as the government disinvests will do so purely as a risky investment that can offer high returns. That being the case, the prospect of the government successfully carrying through disinvestment in PSBs remains low. To keep them afloat, the coming Budget will have to make provisions for further recapitalisation, but that will in all probability be throwing good money after bad.

It is government ownership and partial supervision which have brought PSBs to such a pass. For this, it is the government and not the RBI which should be answerable to the CAG.