THE HINDU EDITORIAL – 2nd November 2017

The stimulus and after

The Financial Times of London described the recent recapitalisation of public sector banks in India as collecting used tiffin boxes. It said banks are like intermediaries, not unlike the dabbawalas of Mumbai who deliver home cooked meals to offices, and return used tiffin boxes back in the evening. Banks collects savings from depositors and give it to borrowers. The intermediaries have not been collecting their deliveries back (that is, the bad loans), and the clean-up is as messy as uncollected used tiffin boxes!

Low credit offtake

The metaphor is a bit mixed up but catches the imagination. A better metaphor would be “cleaning the carburettor” of the credit pipeline. Bad loans have clogged the pipes, and new credit has stopped flowing. One of the most reliable leading indicators of economic growth is the growth of non-food credit. High growth in credit foretells healthy growth of GDP, since credit goes mostly into investment and building of new capacity. India is predominantly a bank finance-led economy, so when bank lending slows down, it surely impacts future growth. Bank credit growth has been at nearly a 60-year low. Even the growth of money supply is at a 55-year low. This stark metric tells us about the growth slowdown. Of course, there are many proximate causes as well, such as demonetisation and the roll-out of the goods and services tax (GST). Credit off take slowed down because of both demand and supply side factors. On the demand side is the fact that industry has low capacity utilisation rates (factories lie idle); domestic industry is losing market share to low cost imports, made worse by GST, which has tilted the field in favour of imports, and also by the strong currency. The corporate sector is also deleveraging and paying off its past high debts. All this means demand from the private sector for large-scale new credit is muted.

Burden of bad loans

On the supply side, the big constraint on fresh lending is the burden of non-performing assets (NPAs). The NPA ratio has been deteriorating for more than six years, and worse is yet to come. The diagnosis of worsening NPAs reveals five different causes, not all caused by the bankers themselves. The first is the disproportionate share of loans that went to infrastructure. These projects are of long gestation and long payback period, so unsuitable for bank lending. That creates an asset liability mismatch for banks, since the liability side is of a short-term nature. During the UPA regime, public-sector banks were under pressure to fund the ambitious $1 trillion infrastructure vision. Normally such projects ought to be funded by long-term bonds or developmental organisations like the World Bank or the Asian Development Bank, or the IDBI in its original avatar. But in the absence of those options of development finance, it fell to public sector banks to provide infrastructure finance. This led to over-exposure. The second reason for deterioration of loans could be the impact of key judicial decisions like abrupt cancellations of coal mines and spectrum allocation. When the same were re-allocated through expensive auctions, it proved to be a fatal burden on respective business models of power, steel and telecom. The third reason for worsening NPA ratios could be the delays caused by land acquisition and environmental clearances. This reason for NPAs was adequately documented in the Economic Survey. The fourth reason is the Asset Quality Review mandated by the Reserve Bank of India (RBI) in 2015. This was much needed, since it put a stop to the “extend and pretend” culture around worsening credit. To be fair, the RBI showed great regulatory forbearance in allowing lenders to work out remedies for genuine cases which faced a business cycle downturn. Various options were made available, including extending duration of loans, debt restructuring, swapping equity for debt and so on. But it does not seem to have made any significant difference. The NPA recovery process has since got a boost due to the new insolvency and bankruptcy law. The government too announced the Indradhanush scheme focused on banking reforms and recapitalisation of NPA-burdened banks. Two instalments of infusion in the past two years proved woefully inadequate as the NPA ratio continued to mount. The fifth reason for worsening NPA is an omnibus called “malfeasance”. This includes cosy relationships between banker and borrower, crony capitalism, political interference in lending decisions (a legacy of the past), a less than vigorous attempt to recover past dues, careless due diligence, etc. There may be other reasons as well. The fact is that 10% of all loans have gone bad. No wonder that after provisioning, for many public-sector banks their net worth would be completely eroded. Hence the days of piecemeal and feeble remedies are gone.

More reforms needed

In the light of this background, the decision to inject ₹2.11 lakh crore of capital into public sector banks is a welcome boost. This was also evident from the reaction of the stock market as some bank stocks soared by as much as 35%. It is somewhat a moot point that this injection could have been done at least one year ago. The injection is clever because it has been done without busting the promised fiscal deficit target. It has been financed by the sale of recapitalisation bonds. Banks are currently flush with cash which was deposited after demonetisation. Much of that same cash will be used to buy those bonds. The proceeds of the sale of these bonds will be put back into the bank as fresh equity by the government. It’s a neat roundtrip of depositors’ cash coming back as capital. To that extent it is taxpayers who are funding this equity injection. More details are awaited. For instance, since banks are listed entities, should not other shareholders apart from the government also be asked to make a matching equity infusion? What about the windfall gains that arose as a result of this equity infusion? How will the bonds be repaid by the government? What will be their duration? Will they be traded? Would they instead be converted into perpetual bonds, never to be repaid, as was done to the 1992-93 bonds? Suffice to say that this capital infusion provides banks with the much-needed room to make fresh loans. In the coming days of Basel-3 where much capital is needed for risk provisioning, the NPAs are a millstone which prevent fresh lending. With this big bang recap effort, we can expect the growth pipes to be unclogged. Of course, the recapitalisation effort is useless without accompanying reforms which can prevent a recurrence. Those reforms are mostly about governance, meaning granting genuine autonomy to banks in their functioning, including all aspects such as lending, recovery, and recruitment decisions. Banks have to be accountable to shareholders, including the government, through their respective boards. That’s the fourth crucial “R” that was part of this recap package – recognition, recapitalisation, resolution and reform. Without reform of credit functioning, culture, treatment of delinquencies and even ownership structure in banking, this recap effort will only be stopgap. Assuming reform is coming (witness the huge increase in India’s global rank in ease of doing business), let’s raise a toast to the bank recap.


1) Messy

Meaning: (Of a situation) confused and difficult to deal with.

Example:  A messy divorce.

Synonyms: Chaotic, Convoluted,

Antonyms: Straightforward, Amicable

2) Metaphor

Meaning: A thing regarded as representative or symbolic of something else.

Example: The amounts of money being lost by the company were enough to make it a metaphor for an industry that was teetering.

3) Carburettor

Meaning: A device used in petrol engines for atomizing the petrol, controlling its mixture with air, and regulating the intake of the air-petrol mixture into the engine.

4) Clogged

Meaning: Block or become blocked with an accumulation of thick, wet matter.

Example: The gutters were clogged up with leaves.

Synonyms: Block, Obstruct

Antonyms: Unblock

5) Foretells

Meaning: Predict (the future or a future event).

Example: A seer had foretold that the earl would assume the throne.

Synonyms: Predict, Forecast

6) Stark

Meaning: Severe or bare in appearance or outline.

Example: The ridge formed a stark silhouette against the sky.

Synonyms: Sharp, Clear

Antonyms: Fuzzy, Indistinct

7) Proximate

Meaning: (Especially of the cause of something) closest in relationship; immediate.

Example: The fact that a storm may show up the poor condition of a flat roof does not signify that storm was the proximate cause of damage to it.

8) Roll-out

Meaning: The official launch or introduction of a new product or service.

Example: Campaigns these days look a lot like product roll-outs.

9) Off take

Meaning: The removal of oil from a reservoir or supply.

Example: The main reasons for this jump are two: increased sales volumes and less upliftment from Reliance Industries Ltd, pending finalisation of its product offtake agreement with Indian Oil.

10) Deleveraging

Meaning: The process or practice of reducing the level of one’s debt by rapidly selling one’s assets.

11) Paying off

Meaning: The return on investment or on a bet.

Example: The potential pay-off is enormous.

Synonyms: Return, Profit

12) Constraint

Meaning: Stiffness of manner and inhibition in relations between people.

Example: They would be able to talk without constraint.

Synonyms: Inhibition, Embarrassment

Antonyms: Openness

13) Deteriorating

Meaning: Become progressively worse.

Example: Relations between the countries had deteriorated sharply.

Synonyms: Worsen, Decline

Antonyms: Improve

14) Reveals

Meaning: Make (previously unknown or secret information) known to others.

Example: Brenda was forced to reveal Robbie’s whereabouts.

Synonyms: Divulge, Disclose

Antonyms: Hide, Conceal

15) Gestation

Meaning: The development of something over a period of time.

Example: A thorough and painstaking work which was a long time in gestation.

Synonyms: Development, Formation

16) Ambitious

Meaning: (Of a plan or piece of work) intended to satisfy high aspirations and therefore difficult to achieve.

Example:  An ambitious enterprise.

Synonyms: Difficult, Exacting

Antonyms: Modest, Easy

17) Ought to

Meaning: Used to show when it is necessary or would be a good thing to perform the activity referred to by the following verb.

Example:  You ought to be kinder to him.

18) Avatar

Meaning: An incarnation, embodiment, or manifestation of a person or idea.

Example: He chose John Stuart Mill as the avatar of the liberal view.

19) Abrupt

Meaning: Sudden and unexpected.

Example: I was surprised by the abrupt change of subject.

Synonyms: Sudden, Immediate

Antonyms: Gradual, Unhurried

20) Auctions

Meaning: A public sale in which goods or property are sold to the highest bidder.

Example: the books are expected to fetch a six-figure sum at tomorrow’s auction.

21) Acquisition

Meaning: The buying or obtaining of assets or objects.

Example: Western culture places a high value on material acquisition.

Synonyms: Gain, Attainment

22) Pretend

Meaning: Behave so as to make it appear that something is the case when in fact it is not.

Example: I closed my eyes and pretended I was asleep.

Synonyms: Profess, Affect

23) Forbearance

Meaning: Patient self-control; restraint and tolerance.

Example: His unfailing courtesy and forbearance under great provocation.

Synonyms: Tolerance, Patience

24) Downturn

Meaning: A decline in economic, business, or other activity.

Example:  A downturn in the housing market.

25) Infusion

Meaning: The introduction of a new element or quality into something.

Example: The infusion of $6.3 million for improvements.

26) Woefully

Meaning: In a manner expressing sorrow or misery.

Example: She sighed woefully and walked out.

27) Omnibus

Meaning: Comprising several items.

Example: Omnibus editions of novels.

28) Malfeasance

Meaning: An example of dishonest and illegal behaviour, especially by a person in authority.

Example:  Several cases of malpractice and malfeasance in the financial world are currently being investigated.

29) Cosy

Meaning: Giving a feeling of comfort, warmth, and relaxation.

Example: The flickering lamp gave the room a cosy lived-in air.

Synonyms: Snug, Warm

Antonyms: Uncomfortable

30) Diligence

Meaning: Careful and persistent work or effort.

Example: Few party members challenge his diligence as an MP.

Synonyms: Assiduity, Rigour

Antonyms: Laziness, Careless

31) Piecemeal

Meaning: Characterized by unsystematic partial measures taken over a period of time.

Example: The village is slowly being killed off by piecemeal development.

Synonyms: Gradually, Slowly

32) Feeble

Meaning: Lacking physical strength, especially as a result of age or illness.

Example: By now, he was too feeble to leave his room.

Synonyms: Weak, Puny

Antonyms: Strong

33) Soared

Meaning: Fly or rise high in the air.

Example: The bird spread its wings and soared into the air.

Synonyms: Wing, Ascend

Antonyms: Plummet

34) Roundtrip

Meaning: A journey to one or more places and back again, especially by a route that does not cover the same ground twice.

Example: The next week, after I had returned the car, I was presented with the data of my weekend’s journeys, which included one 60 mile round trip to Mornington.

35) Perpetual

Meaning: Never ending or changing.

Example: Deep caves in perpetual darkness.

Synonyms: Everlasting, Eternal

Antonyms: Transitory, Temporary

36) Autonomy

Meaning: Freedom from external control or influence; independence.

Example: The courts enjoy a considerable degree of autonomy.

Synonyms: Self-government, Sovereignty

37) Reform

Meaning: Make changes in (something, especially an institution or practice) in order to improve it.

Example: The Bill will reform the tax system.

Synonyms: Improve, Better

Antonyms: Preserve, Maintain

38) Delinquencies

Meaning: Minor crime, especially that committed by young people.

Example: Social causes of crime and delinquency.

Synonyms: Crime, Lawlessness

39) Stopgap

Meaning: A temporary way of dealing with a problem or satisfying a need.

Example: Transplants are only a stopgap until more sophisticated alternatives can work.

Synonyms: Improvisation, Expedient

Antonyms: Permanent

40) Toast

Meaning: A person or thing that is very popular or held in high regard by a particular group of people.

Example: He found himself the toast of the baseball world.

Synonyms: Favourite, Pet