Is this aka undoing of demonetization?

Until mid 2015, the market value of PSU banks had not fallen so much. It was known even then that PSU banks would need about Rs.2.5 lakh crore of fresh capital. But for some reason the NDA government postponed taking action. The banks needed a one-time big dose of capital but the finance ministry preferred the piecemeal approach by adding very small doses of fresh capital. If fiscal deficit was its concern, it could have done in 2015 budget what it has done today – make a big infusion of capital which is fiscal neutral.

But by postponing the big capital infusion, the finance ministry let the problem of bank capital fester and by March 2017 the market value of the entire public sector bank universe had collapsed by about 50%. This deterioration was playing out before our eyes even as private banks and NBFCs grabbed two-thirds of total lending in this period.

In January 2016, The Times of India reported that the stock value of just one private bank HDFC became equal to that of 21 nationalised banks including the SBI. These 21 banks controlled 70% of the outstanding credit market compared to HDFC’s 6% . And yet, HDFC’s stock price was equal to that of 21 PSU banks put together. This was the first big warning that all was not well with PSU banks. The situation has probably worsened today. In early 2017, there was the expectation that demonetisation would extinguish enough black money to enable a big infusion – about Rs 3 lakh crore – of fresh capital in banks. But that did not materialise. PSU bank lending growth registered a multi-decade low in the nine months after demonetisation. Having failed on this front, the finance ministry is now embarking on recapitalising banks on an urgent basis.

So clearly the big action from the finance ministry has come three years too late.The ministry expects these banks to additionally raise about Rs.56,000 crore from the market quite apart from the government recapitalisation efforts. Hopefully the IPO market will have enough appetite to absorb equity issues from just one sector.

Overall, the story is one of the taxpayer bailing out the banks and defaulting corporate groups whose promoters will still end up laughing all the way to the bank.