 Hello and welcome to NewsClick. As you all know Indian banking sector at present is going through a crisis due to the mounting NPAs. Two days ago, government has announced recapitalization of the public sector banks. So to talk about this issue, today we have here with us Professor Shri P. Chandrasekhar. Hello sir, welcome to NewsClick. Nice to be here once again. Sir, what do you think of the recapitalization that government has announced? There has been a lot of coverage in the newspapers saying that this actually amounts to a bailout of the big capital. First, what does one say about the recapitalization itself? As many people have already noted, there is obviously a slight of hand here because in essence what you're saying is you're not going to show it in the budget excepting for 18,000 crores, which was in any case something which had been all allotted as part of the budget. There was this earlier an idea that there'd be 20,000 crores or 25,000 crores and there's about 18,000 crores they now say are going to be come directly from the budget. So you're really saying that the chunk of the recapitalization of bailout or whatever you want to call it essentially consists in the fact that 135,000 crores is going to be mobilized by the issue of recapitalization bonds and another 58,000 crores ostensibly through the sale of public bank equity, which would dilute the government share. Now as far as the sale of 58,000 crores of public bank equity is concerned, the problem would be that so long as bank books are sort of burdened with these large volumes of non-performing assets and they begin to tell as these NPAs are actually provided for, they begin to tell on profits in a major way, it will be either near impossible to sell a significant amount of public bank equity or it would have to be sold at prices which would actually be prices which would not make sense, would actually be handing over a major public infrastructure in terms of banking infrastructure to private players at a pittance and therefore prove extremely controversial. So I think the whole plan really hinges on the ability to use the 135,000 crores to be mobilized through the issue of these bonds to actually recapitalize these banks and once they recapitalized obviously then to put a certain amount of equity in the market would not be so difficult because what you're doing is you're first cleaning the books of the bank and then you're asking the private sector to come and buy into them and they obviously would remain significantly profitable assets so long as they run properly. Now the difficulty of course with these 135,000 crores is that one is the government obviously doesn't want to show this in the budget but the fact that the chief economic advisor has already said that listen this is going to result in interest payments on the budget of something like 8,000, 9,000 crores is clearly an indication that this is something which should sit if accounting is done as per what would be appropriate norms this should sit in on the budget and therefore people are not going to be sort of not going to buy into the idea that this is not something which would implicitly amount to an outlay of public resources in the form of future resources because it amounts to the government issuing these bonds to borrow money for the budget which is then going to be used to recapitalize the banks. Now assume that the government actually doesn't put this on its books as it claims it's not going to that doesn't mean that people are not going to say that there is some problem with this this is essentially a kind of an attempt to bail out the banks or to sort of you know improve the book position of the banks and write off their non-performing assets by essentially putting a burden on the budget which is not being shown but it would be because very clearly where is the interest payment going to come from which essentially means that at some point of time the capital will also have to be paid out by the by the government. Now okay that is that is as far as the first part of it is concerned how you're going to mobilize the money in the way of what exactly are these bonds and how are they independent of the budget the second part is who's going to buy these bonds and the expectation is that the very banks which actually are going to be recapitalized are going to buy into these bonds okay so the idea is that the banks would now instead of lending money which they don't want to lend because of the already large amounts of non-performing assets would use their deposit basis their deposit resources to invest in in in government bonds this money would then be used to recapitalize the public banking system you're in essence saying that what you're going to do is you're going to tell banks to actually invest in government securities and use the use the money from that to give it back to the banks which also is a is a is a strange slight event so altogether this is going to be something which is quite controversial because as far as the real part of it is concerned which is the 135,000 crores it really is something in which the accounting is going to be a fraudulent accounting process now as far as the other part of your question very briefly which is that that this bailout is really a bailout of big business that would be true because implicitly the moment you say that I'm going to actually go and put money recapitalize these banks you're saying that you do not expect the technical write-off in terms of the technical write-off of NPAs which you have to you're forced to do because of the RBI guidelines is not going to convert itself into a process in which there's going to be a significant amount of recovery that is you can actually say that I'm going to have a complete write-off I'm not going to get back this money you can have some kind of a compromise where you say that let's say for every rupee I'll try and get back maybe you know 20 paisa or 30 paisa whatever it may be and three of course as you can say that listen I'm actually going to take the assets of these these companies to market and try and retrieve as much money as possible which is what the whole idea of of sending those cases to the national company Lord Tribunal was so this seems to be an admission that that is not working they're trying to recover money I mean you know you first of all you it's very difficult to identify assets and get them without encumbrances when you get them you know you actually find that it's difficult to sell them because of the nature of the of the titles etc so the government is obviously saying that even those 12 companies which account for 25 percent of the total non-performing assets is not going to yield it very much of the banks very much so you're in essence saying that I'm going to take taxpayers money in the long run and use it to recapitalize the banks because of the fact that I can't get those private players who took these large volumes of money from the public banks who are encouraged by the state to lend to these to these to these projects and you essentially essentially are going to let off those people as you say it is a bailout which is in the nature of a bailout which actually is going to help big capital which has used the opportunity of financial liberalization to take large credit from the banking system is the recapitalization and the getting back you know whatever we can of the NPAs are the mutually exclusive because the banking sector employees have been demanding some recapitalization because they were saying that credit is being squeezed because of lack of capital of the bank the government has to put in the money to recapitalize these banks and I would have thought that the best ways for the government to actually have asked these banks to increase the size of their paid up capital and bought into more equity so that these banks have get recapitalized with government ownership okay now obviously you're not you're not doing that you're basically saying that you're going to have some funny system by which the government is going to give money to the banks to recapitalize in terms of equity but the banks are going to give the government that money by buying its bonds okay so but but as I said I mean you can't you can't blame the banks for the position they are in the banks are in the position they are in is because of the fact that the government which shut down the development finance institutions in a country in which the corporate bond market is not very active the government was forced to get the public banks the private banks didn't do too much of this to get the public banks to lend to projects which are part of its infrastructure creation as part of its neoliberal strategy because that the government had to had to create infrastructure but it didn't want to do it from the budget because it had a fiscal deficit target or whatever three percent or less so therefore it had to recapitalize but the point is just because it had to recapitalize doesn't mean that there is no political economy behind it and what I'm trying to say is political economy behind it is that you're socializing the losses of the public sector banks and in doing that what you're going to do is in essence let off these companies because then once the recapitalization happens the pressure to actually go after them and try and find every bit of asset which you can which you can sort of monetize is going to come down there has been an estimate that banks actually public sector banks actually are in need of capital to the tune of 4.5 lakh crores or 5 lakh crores whereas government in effect announced maybe little even less than 2 lakh crores so also based on the comments of chief economic advisor Arvind Subramanian there seem to be a plan it seems to be delivered that less capital is given than is required because they want to shrink the banks or merge the banks or shut down the smaller banks what would be the implications looking but in this way this is if the government if the government had not adopted the basal norms and said that you need a capital adequacy of this kind you know and had basically said that listen I'm going to use liquidity from the central bank or from the budget whichever way you want to you want to go about it to keep propping up these banks giving them time over a period of time to write off this and use their whatever the remaining profits that they have to rebuild their books that you know so long as they're sovereign banking these banks are not going to collapse so long as the use the right of note issue of the central bank as well as the budget of the government to back these these banks they wouldn't have got so really the problem is if you say that listen I want a particular capital adequacy ratio to be realized as per the requirements of basal three which have got stricter and I'm going to have more stricter guidelines for recognition of loss making assets then obviously you're caught in the recapitalization trap now the point is how much is that money how much is it going to be it would all depend also on how much more of the debt which has been provided in the period after 2004 is actually going to go back the more it goes back the more you'll have to recapitalize but I I don't think you're in a situation where you say that you need four like four lakh rows or you need five light rows what you need would depend upon the degree to which you're saying that I'm I'm not going to assert my right to provide sovereign banking to give time to the banking system to actually find its own feet without putting a pressure on it to lend to you know all sorts of infrastructure projects which are not going to take off or lend to the hotel industry to build seven star hotels and so on so out of this out of the private airlines for that matter thank you professor Chandrasekhar thank you for giving us your time okay thanks thank you sir