The Union Budget 2016-17 turned out to be a damp squib for banks as the public sector lenders, weighed down by capital-eroding bad debts on their books, did not get any capital injection beyond Rs 25,000 crore (Rs 250 billion) announced last year.
The government, however, gave a push to consolidation of public sector banks.
Finance Minister Arun Jaitley said the government has started the process of transforming IDBI Bank and will look at bringing down its stake in the bank below 50 per cent, from 80.16 per cent now.
The Bank Board Bureau, set up on February 28 with former comptroller and auditor general Vinod Rai as its first chairman, will propose ways for consolidation of existing public sector banks.
The immediate priority, however, is to strengthen banks’ balance sheets.
“Our public sector banks will have to be strong and competitive,” Jaitley said in his speech, adding “the Bank Board Bureau will be operationalised during 2016-17 and a roadmap for consolidation of public sector banks will be spelt out.
"Consolidation will not be an alternative for improving banks’ balance sheets,” Jaitley clarified in a televised meeting with the editors.
Later in the evening, in his interaction with the press, the FM said the government was committed to bring down its stake in public sector banks to 52 per cent, but not before strengthening their balance sheets.
“Our immediate agenda is to strengthen the banks,” Jaitley said, adding, the capitalisation number quoted in the Budget may not be the final one.
“This is not the last word on recapitalisation. Be prepared for something more.”
The FM said there was still some recapitalisation amount left from this year to be carried forward to the next year.
The process of transformation of IDBI Bank has already started and “government will take it forward and also consider the option of reducing its stake to below 50 per cent,” Jaitley said.
Responding to the government’s intent of reducing its stake below 50 per cent, B K Batra, deputy managing director of IDBI Bank said the move, whenever it takes place, will provide greater flexibility to the bank in its operations.
Earlier, government’s stake in the bank had dipped below 60 per cent, creating rigidity in raising capital.
Because of this, the government had to first infuse capital in the bank to create some room for raising capital from others, Batra explained.
He said the latest proposal would free the lender from any such constraints.
But IDBI could be the easiest and obvious target for bank privatisation. It is established under the Companies Act and a privatisation proposal need not be moved in the Parliament.
“What is feasible for IDBI may not be feasible for other banks,” said Ananda Bhoumik, senior director, India Ratings and Research.
The analyst community was largely expecting the government to propose higher capital infusion for public sector banks, but that did not happen.
The proposed Rs 25,000 crore (Rs 250 billion) infusion is part of the planned recapitalisation that the government announced last year, under its ‘Indradhanush’ programme.
As per this plan, the government will invest Rs 70,000 crore (Rs 700 billion), in phases, in public sector banks.
It has already invested Rs 19,950 crore (Rs 199.5 billion) in 13 public sector banks.
Hence, the Budget didn’t offer anything new on recapitalisation front except Jaitley’s assurance that the government stands “solidly behind these banks” and, if needed, would invest more.
Analysts were not assured though.
“The support provided by the Union Budget was very inadequate,” said Vaibhav Agrawal, head of research at Angel Broking Ltd.
“Overall, there was nothing much to address the stressed assets of public sector banks. Inadequate capital support would mean that the banks would have to be dragged on and provide for bad debts from their own P&L (profit and loss account) and they won’t be able to lend much,” Agrawal said.
To help a faster resolution of stressed assets, the finance minister said the debt recovery tribunals will be strengthened, and the government will computerise processing of court cases to improve the existing infrastructure.
The government will also try and push for the passage of Insolvency and Bankruptcy law, Jaitley said in his speech.
Apart from the resolution mechanism for companies, a comprehensive Code on Resolution of Financial Firms will be introduced as a Bill in the Parliament during 2016-17.
This Code will provide a specialised resolution mechanism to deal with bankruptcy situation in banks, insurance companies and financial sector entities.
Image: Union Finance Minister Arun Jaitley at the launch of the official YouTube channel of the ministry in New Delhi on Thursday. Also seen are Finance Secretary Ratan P Watal and Secretary (Economic Affairs) Shaktikanta Das. Photograph: PTI Photo.
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