Banks recapitalisation is seen as an exercise, carried by the govenrment of India, in order to save them falling, to rescue them, to fulfill the gap created due to NPAs. Its good for the moment, but in my view, there could be better strategies, better alternatives, more innovative ideas to prevent them falling, failing via a snowball effect.
This exercise is seen as a more handholding exercise by the government. This is done by the government, from the sheer thought of fear, that if public sector banks fail (haircuts have not helped them either to recover maximum loss), no one even dare to point out any finger to the government. Because they are public sector: their failure would mean failure of the government, and it is also truth from perspective, that, if government can't keep depositor's money safe, then what is government for?
Earlier, RBI had taken decisions to merge some ailing public sector banks with the healthy ones. However, the government is not seen to rely on this process of merging banks in future everytime, because this takes a heavy toll on the administrative reshuffle of the merged banks: salaries, pensions etc. of the banking personnels become more important, and this is obvious because people become more important than money. We got this experience when we merged 5 associate banks of State Bank of India. So, we drop this idea, as far as the idea of 'saving' banks is concerned.
So, we took recourse to recapitalisation. This includes market sources, funding by the government bonds and budgetary allocation. This three pronged approach is good, but is temporary. After the banks get access to the pool of money, again lending to the long gestation projects will start (though not in the same scale as it was, during post liberalisation, more specifically between 2000-2005)
So, again NPAs will mount up, again government will come to rescue for the banks via recapitalisation methods.
For how many years, we will see this? This is a cycle, trust me. This will not stop as long as India is developing. We have yet not reached, the so called state of growth rate of 1.8%, to quote the growth rate of USA, the developed country. We still aim to double the farmer's income by 2022. Double the housing by 2022. So, in that case, banks have to lend, and some portion of lending will turn into NPAs in the process.
Now let me come to the final agenda. What I try to say is that, go for the following routes to solve the problem of banks:
1. the government need not come to the rescue for the PSBs. Fund these banks from oil bonds. Meaning, raising money in the international market from the oil bonds. West asian countries, nigeria, venzuela etc will be the prime source of funds.First the money will come from these countries, they will go the banks. Then will come oil. These bonds will be raised by the government(this is more similar to market borrowing of the government in the present recapitalisation scheme.Difference lies, in that this route need to have more than 70% share of the total recapitalisation capital. At present it is less than 50% and it is not oil bonds). Benefits will be that, the banks will be, first, stomach full. The interest rates will be low, to be repaid over a large period. During this period, the country will export equivalent amount of petroleum products to these countries (or diversified export basket plus, capital)
This will work, because, India oil dependence will continue for some 20-30 years (till the time Rajasthan fields, Krishna Godavari gas fields will make India self sufficient), so it would be easy to fund these banks with capital from these countries, and at the same time will be able to export gems, jewelley, petroleum products to these markets (as per the will of these oil rich countries)
2. When we do not want to supply money to the banks, we will not raise money via oil bonds, automatically, there will be no compulsion on exporting the goods these countries.
India has to bring in maximum innovation in governance, to leapfrog. People will appreciate and trust the governance, if the objectives are fine.