A Case of ‘Lemon Socialism’

On 24 October, Union Finance Minister Arun Jaitley announced a ₹2.11 lakh crore recapitalisation plan for public sector banks in India. In funding this plan, ₹1.35 lakh crore is expected to come from the issue of recapitalisation bonds, while the remaining ₹76,000 crore will be through budgetary allocation and market borrowing. With the stockpiling of non-performing assets in the banking sector and insipid credit growth, such a measure for recapitalisation has been welcomed by select stakeholders. The equity prices of various bank stocks experienced a sharp spurt following this announcement, and consequently, the announcement has received generous reception from public sector bankers and private equity market players alike.

Admittedly, the context of the current recapitalisation is characterised by two key developments. First, public sector banks have experienced a steady deterioration in the quality of assets. The Reserve Bank of India (RBI) noted in its annual report for 2016–17 that as of end-March 2017, 12.1% of the advances of the banking system were stressed. These assets are a sum of gross non-performing assets and restructured standard advances. The public sector banks continued to incur net losses during 2016–17. This deterioration has been happening since 2009 when in the wake of the global financial crisis, Indian regulators behaved as if this country had a similar crisis and resorted to measures of regulatory forbearance. The resultant exuberance in lending to infrastructure projects via the public–private partnership (PPP) model, coupled with governance issues in select public sector banks and associated reports of crony capitalism added to this baggage of non-performing assets.