On 24th October, Finance Minister Jaitley announced that the Government of India plans to spend Rs 2,11,000 crore over the next two years to “recapitalise” the public sector banks. Under the Indradhanush plan announced in 2015, the government had announced that it would infuse Rs 70,000 crore of capital into the government owned banks over four years. Two years later, the capital to be put into the banks has risen by nearly three times.
Why do banks need to be recapitalised?
A bank is allowed to advance loans to the extent of 10 times its own capital. In other words, the ratio of its own capital (also called equity) to its outstanding loans must be at least 10 percent.
For example, a bank which has Rs 100 crore of capital can have at most Rs 1000 crore as outstanding loans. Now if that bank has to write off Rs. 50 crore of those as bad loans that cannot be recovered, then its own capital gets eroded by that amount. The bank’s capital declines to Rs 50 crore and outstanding loans decline to Rs. 950 crore. That means its capital ratio has fallen well below 10 percent. To raise that ratio back to the required level, that bank has to raise Rs 45 crore of additional capital. It has to be recapitalised. Otherwise it has to stop all new lending and call back the loans it has already advanced, so as to reduce its outstanding loans from Rs. 950 crore to Rs. 450 crore.
The need to recapitalise the banks has risen because of the problem of high non-performing assets or bad loans which the banks are unable to recover from the capitalist companies which have borrowed from them. (see Box)
The amount of recapitalisation required is increasing because the problem of bad loans is growing from bad to worse. From 8.4% of total outstanding bank loans in June 2016, the proportion of bad loans rose to 10.2% in June 2017. Finance Minister Jaitley recently admitted that the bad loan problem was largely confined to 50 large capitalist monopoly houses, who account for more than 80 percent of the problem. What the Finance Minister did not reveal was the fact that his own government has continued to protect these monopoly houses. As a result, the bad loans ratio has doubled in 3 years, from 4.4% in 2014 to 10.2% in 2017.
It is to be noted that as much as Rs. 2,49,000 crore of bad loans have been written off by the banking system over the past 5 years. About Rs. 81,000 crore was written off in just one year, 2016-17. Once more capital is infused, more loans are likely to be written off.
By investing additional capital in the public sector banks, the central Government is also paving the way for their privatisation, by improving their balance sheets and making them more attractive to private bidders.
How is the central Government planning to finance the huge additional expenditure of Rs. 2,11,000 crore? It plans to finance as much as Rs 1,30,000 crore by issuing “recapitalisation bonds” to the banks into which it is putting its money. This means that the government will borrow this huge sum of money from the banks and give it back to them as equity investment. It plans to raise an additional Rs. 58,000 crore by selling its ownership shares in the market; that is, through disinvestment or partial privatisation. The remaining Rs. 23,000 crore will be financed by additional tax revenues expected to be collected over the next two years.
It must be noted that the banks in our country have been sitting with a very large amount of people’s savings that have been deposited with them following the Note Ban of November 2016. The Reserve Bank of India estimated the excess deposits which accrued to the banks due to the Note Ban to be more than Rs. 3,00,000 crore. The banks could not make use of all this money deposited with them to make additional loans, because of the bad loan problem leading to a decline in their capital ratio. Now these deposits will be used by the banks for buying the “recapitalisation bonds” issued by the government.
The recapitalisation bonds will increase the outstanding debt of the Government of India, whose burden falls on the entire people. Additional borrowing of Rs 1,30,000 crore means additional interest payments of about Rs. 9,000 crore every year. It is the people who will be made to bear this additional burden in the form of higher taxes and inflation, leading to higher prices of consumption goods.
In sum, the central Government’s decision is aimed at bailing out public sector banks and paving the way for their privatisation, all for the benefit of the biggest capitalists of the country, at public expense. The entire people of India are being made to pay for the crimes of the capitalist loan defaulters, headed by the monopoly houses which control political power and finance the ruling and principal opposition party in Parliament.