Economic Survey: Why erosion of taxpayers’ money in PSBs is a much deeper issue

While the Economic Survey helps in quantifying the loss, it fails to point out the graver issues at hand

The humongous infusion of capital into PSU banks (PSBs) in recent years has done little to revive the ailing lenders. On the contrary, the value destruction for the government — the largest shareholder in these banks — has been mind-boggling.

Sample this. The Centre’s holdings in PSBs is worth just about ₹3.54-lakh crore in market cap. But it has infused over ₹3-lakh crore into these banks over the past decade.

But aside from costing the Centre — purely as an investor — dearly, the massive recapitalisation drive has had a graver impact on the economy and the taxpayer. The Economic Survey has neatly drawn home the point by some interesting figures and comparisons.

Lost opportunities

For instance, in 2019, PSBs’ collective loss of over ₹66,000 crore could nearly double the nation’s budgetary allocation for education. Their GNPAs (gross non-performing assets) of ₹7.4-lakh crore is more than 150 per cent of the total infrastructure spend in 2019. Also, every rupee lent to wilful defaulters has seen an erosion of wealth.

As of 2018, wilful defaulters owed their lenders nearly ₹1.4-lakh crore. If this money had been ploughed back into the economy, it could have doubled the allocation towards health, education and social protection, doubled the allocation towards rural development, or tripled the allocation towards MGNREGA. Given that PSBs constitute the chunk (80-90 per cent) of NPAs or bank frauds, the enormity of money siphoned off by wilful defaulters owing to weak credit appraisal and internal processes is obviously a big cause for worry.

But the Economic Survey only goes as far as drawing such hard-hitting comparisons and making ‘what-if’ statements. Aside from making some cursory comments on the implementation of long-awaited reforms suggested by the Narasimhan committee or PJ Nayak committee, and stressing on the need to hire better talent and use credit analytics, the Survey fails to capture the real extent of the problem. It also fails to suggest a concrete roadmap for dilution of the government’s stake in PSBs, which is a larger issue at hand.

Actual value erosion

The Survey has arrived at the value of erosion of taxpayer money in PSBs by taking into account the divergence in performance of private and PSU banks. In 2019, the Survey found that every rupee invested in PSBs lost 23 paise (based on return on equity), while every rupee parked in new private banks earned 9.6 paisa. Given that over ₹4,30,000 crore of taxpayer money is invested as the government’s equity in PSBs, the foregone return on the taxpayer’s investment in PSBs works out to ₹1.4-lakh crore, equal to the amount provided for food subsidy.

But then the problem is far greater than just losses made in a year or lost investment opportunity. The mindless capital infusion by the Centre into PSBs, particularly in the last three years, is a much larger issue that needs immediate attention.

The government infusing capital year after year into PSBs has eroded value for investors, as this is done at a steep discount to their book value (0.4-0.7 times), immediately leading to dilution in equity base. With the Centre infusing a massive ₹2.7-lakh crore in the past three years (more than double the amount infused over the past decade until FY17), the erosion has been deeper. In FY19, the Centre infused ₹1.06-lakh crore into PSBs, most of which were trading at 0.4-0.6 times their book value.

Given the persisting dismal performance of PSBs (many of which continue to post losses), the valuation of these banks is unlikely to improve. The Survey then hoping for price-to-book (market-to-book ratio) for PSBs to double, and yield ₹5.2-lakh crore in gains to the government, appears a far-fetched theory at this juncture. For market perception to improve and drive valuations, there has to be a drastic overhaul of the governance structure and greater autonomy for bank boards.

A peculiar challenge

Above all, the Survey fails to highlight the biggest problem at hand for the Centre. Over the past five years, the stake of the government in many PSBs has shot up from 60-70 per cent to over 90 per cent. Much of the sharp rise in government holdings has happened in the last two years, thanks to the humongous capital infusion.

For instance, the government’s holding in Corporation Bank stood at 63.3 per cent in 2014-15. This shot up to 93.5 per cent as of September 2019. In the case of United Bank of India, the government’s stake has gone up to 96.8 per cent from 82 per cent five years ago. The key fallout of high government stakes is that it not only limits the scope for huge infusion, but also puts the Centre in a sticky spot, having to pump in taxpayer money year after year.

Despite the Big Bank consolidation move, the government’s holding in the mammoth merged entities could still be 80-85 per cent. Meeting the capital requirement of these gigantic banks will only mean throwing more good taxpayers’ money after bad.

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