India’s bailout plan won’t help its really bad banks—and that’s a good thing

Sound plan.
Sound plan.
Image: Reuters/Shailesh Andrade
We may earn a commission from links on this page.

India is unlikely to throw good money at the worst of its bad banks.

“Government officials have indicated that capital injections are to be targeted at supporting lending growth, which suggests the healthiest state banks—generally the larger ones—will be the main recipients,” credit rating agency Fitch said in a report released on Jan. 10. Lenders on the Reserve Bank of India’s (RBI) watchlist for rising non-performing assets (NPAs) are likely to be handed only modest sums, added Fitch.

Even though this may leave certain weak lenders bitter, it will only ensure that they don’t excessively rely on bailouts and, instead, focus on cleaning up their books. Moreover, the government’s message is clear: Recapitalisation is meant to prod banks into lending more to spur economic growth.

Makes sense

Of the 22 Indian public sector banks, 11 are under the RBI’s prompt corrective action (PCA) plan due to their higher share of bad loans. “…banks currently in the RBI’s PCA framework will receive no more than the capital necessary to ensure they do not breach minimum regulatory capital requirements,” Fitch said.

In October 2017, the government unveiled a massive bailout plan to infuse Rs2.11 lakh crore ($32.43 billion) over the next two years to improve the capital position of the banks.

The Indian banking sector’s gross NPAs increased to 10.2% in September 2017, compared to 9.6% in March. NPAs are loans on which borrowers have stopped repaying either the principal or the interest. 

Analysts agree that rewarding the more efficient banks well help in the long run. “The government has been emphasing that it will pump in capital not only to get them out of the woods but also to speed up the lending growth in the country to boost capital formation,” said Karthik Srinivasan, an analyst with credit rating firm ICRA. 

Even the central bank is in favour of this, as indicated by RBI governor Urjit Patel in December.

“The likely rationale is that if you give it to the struggling banks, then you cant re-initiate credit growth as the money will go into just fixing their balance sheets,” said Siddharth Purohit, research analyst at SMC Institutional Equities, a domestic brokerage.

Besides, recapitalisation is a temporary fix, analysts believe. “The larger question that should weigh before the government is how to improve governance at these banks to ensure that they don’t land up in the same place again,” said Ashivin Parekh, who runs Ashvin Parekh Advisory Services, a consulting firm.