The malicious propaganda campaign launched by the grand old party [read: Congress] to discredit prime minister, Modi and tarnish his image has reached a crescendo with its President, Rahul Gandhi now alleging that the former is hell bent on plundering the Reserve Bank of India [RBI] to the tune of Rs 360,000 crore to deal with the mess created by his policies and actions.
Rahul Gandhi’s indictment is two-fold. First, he holds Modi – dispensation squarely responsible for the mess. Second, he questions the logic of the center asking RBI to give a mammoth sum. On both counts, his diatribe is untenable and preposterous.
As for the mess, he is essentially referring to the banks’ non-performing assets [NPAs] – a euphemism for loans which were not paid back. As on September 30, 2017, the NPAs were a staggering Rs 837,000 crore of which public sector banks [PSBs] alone accounted for about Rs 734,000 crore. These have eroded their capital base and seriously constrained their ability to lend thereby reducing the availability of funds for industries and businesses.
The NPAs are the outcome of indiscriminate lending under UPA – II [2009-2014] led by Congress to those enjoying patronage with the ruling establishment. During that period, banks lent a mammoth Rs 3400,000 crore which was almost double the amount Rs 1800,000 crore lent till 2008. The favored persons continued to get more loans despite non-payment of previous ones. A good chunk of these turned NPAs much before Modi took charge but were swept under the carpet until RBI initiated asset quality review [AQR] in 2015 – under his directions resulting in their recognition.
Modi not only recognized these bad loans but also took up their resolution with alacrity. Under the Insolvency and Bankruptcy Code [IBC], during 2017-18, the banks recovered about Rs 65,000 crore. During April-September 2018, they have recovered Rs 70,000 crore and the current year is expected to end with recovery of about Rs 130,000 crore. That will add up to close to Rs 200,000 crore by March 31, 2019.
Undoubtedly, the mess was created by the actions of UPA – regime. The present government has brought it to the surface and got into action mode to clear it. Yet, to blame Modi for it sounds like the doctor being held responsible for the accident.
As regards the second point, it needs to be clearly understood that it takes time to recover loans notwithstanding strict time lines set under IBC all the more when defaulters are prone to challenge decisions in court. Besides, banks are forced to take haircut in some cases, 50% plus. Hence, there is an urgent need to shore up banks’ capital lest it chokes flow of funds to the industry and trade.
Already, with the RBI having placed 12 out of 21 PSBs under prompt corrective action [PCA] framework [under PCA, they face restrictions on branch expansion, taking deposits, giving credit etc], the industries/businesses especially the small and micro-enterprises [SMEs] are facing a credit crunch. If continued, this could have a devastating impact on growth and employment.
So, last year, the government announced capital infusion of Rs 211,000 crore to be funded by re-capitalization bonds: Rs 135,000 crore; sourcing capital from the market: Rs 58,000 crore and budget support: Rs 18,000 crore. Raising resources by way of bonds and from the market is proving to be a daunting challenge at a time when the balance sheet of the PSBs is weak [courtesy, NPAs] leading to lackadaisical interest among investors.
The above meant that the entire responsibility of funding banks’ re-capitalization falls on the union government. Taking the load on the budget in full would lead to slippage in its fiscal consolidation road-map and attendant disastrous consequences by way of higher borrowing cost, inflation etc. It is therefore, no surprise that the center is seeking support from the RBI.
The secretary, economic affairs, SC Garg may have denied approaching the RBI for transfer of surplus funds from it. But, his admission of the discussions of the finance ministry with the apex bank on what he describes as ‘the appropriate level of capital that the bank need to have to meet various risks’ clearly means that the former is building pressure on the latter.
Currently, RBI has a total reserves [consisting of ‘valuation reserves’, ‘asset development reserves’ and ‘contingency reserves’] of about Rs 963,000 crore. This corresponds to 27% of total assets. Even as the government is insisting on much lower international norm of 14%, its adoption will automatically release of a substantial amount of surplus to be appropriated by it.
How one presents it is not important. The harsh reality is that the union government desperately needs the money and looking forward to the apex bank for help. But, it would be preposterous to blame Modi for this as he is only making efforts to extricate the economy from the unprecedented mess in the banking sector that he inherited from the previous dispensation.
Will the RBI accede to the request?
Prima facie, the governor may be justified in saying ‘no’ as a determination on how much reserves the bank needs for managing various types of risks, ensure financial stability and provide confidence to the markets is entirely its prerogative. The autonomy of RBI in this regard must be preserved. The union government should also drop its idea of nudging the bank to formalize a policy on the yearly dividend it pays to the Center.
However, given the gravity of the situation, dire need to enable banks to play their due role in supporting growth and sincere efforts being made by Modi – dispensation to normalize the situation [including ‘recoveries’ under IBC], the RBI may consider a ‘one-time’ transfer of the required funds. This could be linked to withdrawal from the ‘contingency reserves’ which are meant to address emergency/unanticipated situations.
Whether or not Urjit Patel will agree to this and sanction the required transfer of funds? The picture will become clear on November 19, 2018 when RBI board meets next.