Indian government’s ₹3 trillion gift to banks ended in a money pit

• Five years on, their combined market value increased by ₹2.2 trillion, which is significantly lower than the invested value
  
• Nine of 19 PSBs reported current value of investment higher than the investment amount.
  
• This year, the central bank has cut interest rates thrice by a net 100 basis points or 1% (before this week’s rate cut), but banks passed on only 29 basis points of this benefit to customers.
  

The Government of India and the country’s largest insurer LIC made a losing bet on Indian public sector banks (PSBs). In the last five years, both of them invested a massive ₹3 trillion into 19 such banks.


Five years on, their combined market value increased by ₹2.2 trillion, which is significantly lower than the invested value, said a report by India Ratings and Research.


“Nine of 19 PSBs reported current value of investment higher than the investment amount. The key banks among them are Indian Bank, State Bank of India, Bank of Baroda,) and Canara Bank,” said the report. A large chunk of the market value contribution, by around 53% came from the country’s largest bank, SBI.


When the government kicked off its ‘Indradhanush’ (meaning Rainbow) plan to recapitalise banks, they were not looking out only for a return on their investment. They also wanted banks to push credit growth in a country where growth has been slowing down.


The Quicksand

Unfortunately, loss-ridden banks with toxic loans dragging them down, could neither help themselves nor consumers, and definitely not the country’s economy.


“In reality, the capital infused was largely consumed to tide over losses resulting from provisions required on non-performing assets,” the report said, calling it a quicksand.


This has been the case with Reserve Bank of India’s (RBI) interest rate cuts as well. In the last one year, the central bank has cut interest rates thrice by a net 100 basis points or 1%, but banks passed on only 29 basis points of this benefit to customers, swallowing most of it to fill their own money pit.


This month, the central bank cut interest rates by another 35 basis points and promised to take “whatever steps necessary to make banks pass them on”.


Kickstarting the economy


Like the government, RBI also wants to push for growth, as it predicts that it will fall top 6.9% this year, below their earlier estimates. Yet, helping banks to ensure growth is not a strategy that is working.


Whatever little credit growth that India saw came from private and foreign banks, shadow banks and mutual funds. In fact, the share of state-owned banks in total loans fell from around 61% to 46.5%, in the last five years in spite of government support.


India Ratings suggests that PSBs should look at management overhaul, lengthen the tenure of top management, bringing in private sector leaders and link their pay with stock performance.


“Without structural reforms in place, the government will have to continue to inject capital into banks in times of stress, which will strain its own finances and hinder efforts for fiscal consolidation,” the rating agency said.