Fresh hope amid economic gloom
The announcement of the $30 billion recapitalization package by Finance Minister Arun Jaitley to revive the capital-starved Public Sector Banks has regenerated fresh hope amid the gloom caused by the recent Indian economic conundrum.
While investors across the world have welcomed the series of the reforms introduced by the Modi Government which include demonetization, the enactment of Goods and Services Tax and the Insolvency and Bankruptcy Code, and the launching of the digitalization drive, more specific actions were expected in order to face the mammoth challenge caused by the rising Non Performing Assets of PSBs.
This addition of Bureaucracy Today brings you a comprehensive analysis of the rising NPA’s, and recap bonds and their possible implications for the Indian economy, especially those on the fiscal and external fronts. While the Chief Economic Advisor, Arvind Subramanian, has cleared the air by stating that the infusion of fresh capital is going to be differential incentivizing better performers, it still remains unclear how the Government plans to raise and allocate the capital via Recap Bonds.
The introduction of Recap Bonds will not only aid in meeting the higher provisioning and debts write-off needs of PSBs but also help in adopting the BASEL III norms which mandate a higher capital adequacy ratio. However, there is no exaggeration in saying that the recap drive is just a stepping stone on the path of economic recovery; there is still a long way to go. Also, it would remain interesting to see that whether the whole drive translates into a better credit growth rate and hence the investment climate.
Though the present political dispensation has been correct while terming the bad loan problem a legacy issue, it cannot move away from the charge of a much-delayed response which exponentially scaled up the problem. The recap drive also involves the problem of moral hazard as it would be incentivizing the wilful defaulters at the cost of the taxpayer’s money.
Besides, one should not move away from addressing the root causes responsible for the generation of stressed bank assets. The Government must devise mechanisms to keep a check on irrational exuberance often shown by lenders, assess the project viability diligently, and ensure faster environmental clearances. Also the broader line of reforms including Mergers and Acquisitions, privatization, management reforms, and empowering the Bank Board Bureau should be given prime thrust to reach a logical conclusion.