The article is authored by Mandar Kagade, Policy Analyst with the Bharti Institute of Public Policy (“Bharti”) at the Indian School Of Business
Going against the expectations, Finance Minister Arun Jaitley did not allocate more than the proposed Rs 25, 000 crore towards public sector bank recapitalization. Given the structural issues India is facing with respect to public sector banks (that are unlikely to go away with more capitalization), it appears prudent to stay the course of planned recapitalization than throw more money at the problem in the failed hope that that will return them to health.
The Finance Minister appears to also have avoided (at least for now) the siren call of a sovereign “Bad Bank” (that this author argue against on Business Insider before the Budget) and focused on strengthening the regulatory architecture of asset reconstruction companies. The Finance Minister proposed that the sponsors of asset reconstruction companies be permitted to invest up to 100 % in an ARC.
Constraints on raising capital are one of the reasons hampering the asset reconstruction companies from pursuing opportunities in the distressed loan market vigorously. It remains to be seen if the RBI takes cue from these proposals and rolls back other constraining regulations for asset reconstruction companies. As the author has previously argued, one such regulation requires them to mandatorily furnish 15 % off the purchase consideration in cash; given that loans are difficult to value, such mandates foreclose the option of plugging “valuation mismatches” using security receipts.
The Finance Minister also stated that the government is considering the option of reducing its stake to less than 50% in IDBI Bank. If implemented, this will be giant first step towards bank privatization generally. The Bank Board Bureau (BBB) (that is proposed to commence operations from April 1, 2016) is established to engage with the Board of Directors of all public sector banks to formulate appropriate strategies for their growth and development. Ideally, BBB catalyzed efficiencies should pave the way for privatization of public sector banks down the road.
Finally, the decision to establish an electronic platform for repo market in corporate bonds will incentivize Institutional investors to invest in corporate bonds thus inducing much-needed liquidity.