Recapitalisation of PSBs: The pros and cons

The recent announcement by the Central government regarding infusion of Rs 2.11 lakh crore as capital in public sector banks (PSBs) over the next two years saw the markets going into a frenzy, with the stocks of PSBs gaining by a whopping 10%-40% in a single day. The reaction (or over-reaction) of the markets was on expected lines, though. With the huge pile of Rs 6.8 lakh crore of non-performing assets (NPAs) weighing down on the PSBs, the recapitalisation package comes as a big relief.
 
Now, the pertinent question is: Should the government bail out the PSBs with the common taxpayers’ money, while PSBs squander money on irresponsible, inefficient, or worse, downright dishonest corporate entities? While individual depositors and borrowers are subjected to stringent KYC norms, corporates apparently do not seem to be subjected to such norms by the PSBs. This is evident from the fact that out of the total NPAs of PSBs, about 70% are big-ticket corporate loans. This is all the more worrisome as it exposes the bias of PSBs towards the corporates.
Although the details of the bail-out package are not available, such bail-out sets a bad precedent as it send out a wrong message to both the lenders and the borrowers that the government will come to the rescue of the PSBs even if they lend indiscriminately without exercising due diligence. This way, the PSBs are not likely to mend their errant ways and are more than likely to land themselves in a financial mess once again. Will the government keep on bailing out the PSBs every time they land themselves in financial soup?

A bail-out package is a temporary respite and not a permanent solution. The NPA issue will persist despite the bail-out package. The solution to the NPA issue is to ensure that the PSB boards maintain highest standards of corporate governance and financial accountability. The government needs to enforce such discipline by making the boards fully accountable for their actions and liable for their errors of omissions and commissions. Only then will PSBs become strong enough to compete with private sector banks.