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In the END, the Govt will have NO OPTION but to SELL the Public Sector Banks

Jul 29, 2016


One of the themes I have regularly explored is the mess that public sector banks are in. Some fresh data coming in shows that the situation continues to be hopeless. The following table shows the loan-write-offs of the various public sector banks over the last decade.

Year Write-offs (in Rs crore)
2015-2016 59,547
2014-2015 52,542
2013-2014 34,409
2012-2013 27,231
2011-2012 15,551
2010-2011 17,794
2009-2010 11,185
2008-2009 7,461
2007-2008 8,019
2006-2007 9,189

Source: Reserve Bank of India

The above table clearly shows that the loan write-offs of public sector banks have clearly gone up majorly over the last ten years. Banks essentially raise deposits to give out loans. These loans are typically (though not always) given against a collateral. This is done, in order to ensure that if the borrower stops repaying the loan, then the collateral can be seized and the outstanding loan amount can be collected.

But things don't always turn out like that. Banks are not able to collect every loan that is defaulted on. In the end, they need to write-off these uncollected loans. As can be seen from the above table, the write-offs of public sector banks in India have gone up dramatically over the years. What this tells us is that over the years, banks have been unable to collect a greater amount of loans that have been defaulted on. Indeed, this is a worrying trend.

Now take a look at the following table. This shows that the banks are able to recover some amount of loans that have been defaulted on.

Year Recovery (in Rs crore)
2015-2016 39,534
2014-2015 41,236
2013-2014 33,698
2012-2013 19,832

Source: Reserve Bank of India

What the above table tells us is that the recovery of defaulted loans has been lower than the write-offs in each of the last four financial years. What this clearly tells us is that the ability of public sector banks to recover defaulted loans is limited. In fact, between 2013-2014 and 2015-2016 the ratio of write-offs to recovered loans has gone up from 1.02 to 1.51. This is not a healthy trend.

Let's look at the numbers of the State Bank of India group (i.e. the State Bank of India and its associate banks).

Year Write-offs (in Rs crore) Recovery (in Rs crore) Ratio (Write-offs/Recoveries)
2015-2016 20,873 11,021 1.89
2014-2015 24,052 16,020 1.50
2013-2014 14,670 10,533 1.39
2012-2013 6,880 6,689 1.03

What the above table clearly shows us is that write-offs as a proportion of recoveries have gone up over the years. What is true for the public sector banks as a whole is also true for the SBI group.

In this scenario of increasing write-offs in comparison to recoveries, it is hardly surprising that the government has to keep putting money into these banks. Earlier this month, on July 19, the government decided to pump in Rs 22,915 crore, into thirteen public sector banks.

S. No. Name of Bank Amount (in crore)
1 Allahabad Bank 44
2 Bank of India 1,784
3 Canara Bank 997
4 Central Bank of India 1,729
5 Corporation Bank 677
6 Dena Bank 594
7 Indian Overseas Bank 3,101
8 Punjab National Bank 2,816
9 State Bank of India 7,575
10 Syndicate bank 1,034
11 UCO Bank 1,033
12 Union Bank of India 721
13 United Bank of India 810
  Total 22,915

It needs to be pointed out here that the government has already infused Rs 1.02 lakh crore of capital between 2009 and September 2015 into public sector banks. For 2016-2017, the government has budgeted Rs 25,000 crore to be invested in public sector banks.

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In fact, as the finance Arun Jaitley, said in his February 2016, budget speech: "If additional capital is required by these Banks, we will find the resources for doing so. We stand solidly behind these Banks." This was Jaitley's way of saying that the government will do whatever it takes to keep these banks going.

Of the Rs 25,000 crore allocated towards recapitalization of banks at the beginning of the financial year, Rs 22,915 crore has been allocated to thirteen banks. Of this, the State Bank of India gets Rs 7,575 crore or a third of the allocated amount. 75 per cent of the allocated amount will be released immediately to banks and the remaining will be released later, depending on the performance of the bank.

As of March 31,2016, the total bad loans of public sector banks stood at Rs 4,76,816 crore or 9.32 per cent of the total advances. As of March 31, 2015, the total bad loans had stood at Rs 2,67,065 crore or 5.43 per cent of the total advances. This basically means that during the course of one year, the bad loans have jumped up dramatically. The only reason for this is that, the public sector banks up until now were not recognising bad loans as bad loans. Now the Reserve Bank of India is forcing them to do that.

As we have seen earlier the recovery rate of bad loans of public sector banks is very low. Given this, a significant portion of the bad loans will have to be written-off in the years to come. Hence, Rs 22,915 crore of recapitalization is not going to be anywhere near enough.

Further, as per the Indradhanush Reforms released in August 2015, the capital requirement of public sector banks up to March 31, 2019, has been estimated to be around Rs 1,80,000 crore. Of this, the government will invest Rs 70,000 crore and the remaining the banks are expected to raise from the market.

As the bad loans number of Rs 4,76,816 crore tells us, Rs 70,000 crore will turn out to be a terrible underestimate. In fact, some other forecasts, are way bigger than what the government is estimating.

The PJ Nayak Committee has estimated that the that banks will need a capital of Rs 5.87 lakh crore. The committee further assumes that if the government puts in 60 per cent of the amount then it will need Rs 3.5 lakh crore.

Another estimate made by Viral Acharya of Stern School of Business and Krishnamurthy V Subramanian of the Indian School of Business, in a research paper titled State intervention in banking: the relative health of Indian public sector and private sector banks, suggests bigger numbers.

The professors come up with three scenarios. In what they call the extremely prudent scenario they feel that the public sector banks will need around Rs 9,97,400 crore of capital. In the less prudent scenario, banks will need Rs 6,53,300 crore of capital. In the least prudent scenario banks would need Rs 5,12,300 crore of capital.

It needs to be pointed out that not all of this capital will be required because of bad loans. Basel III norms which require banks to hold greater amount of capital against the loans they give out, come into effect from April 1, 2019. Banks need to prepare to move towards Basel III norms.

In a recent research report Suresh Ganapathy of Macquarie wrote that banks need at least Rs 1.6 lakh crore over the next three years, compared to the Rs 45,000 crore that the government plans to invest.

If the government decides to fund this money out of its own pocket, the fiscal deficit is likely to go through the roof. Fiscal deficit is the difference between what the government earns and what it spends.

In the end the government will have no option but to sell some of these banks. The thing is it will take its own sweet time doing the same.

To conclude, the mess in public sector banks, is not going away any time soon.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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13 Responses to "In the END, the Govt will have NO OPTION but to SELL the Public Sector Banks"

Nand Kanwar Goel

Aug 8, 2016

Thanks for yr beautiful Essay. The problem of recovery of debts and free distribution of Public money to Bogus entities of BIG People is the real problem. There is no effective mechanism for recovery. And sale of Public Sector Banks may not happen in distant future since it is a sacred Cow, where with a slip of paper or instructions over telephone laon are sanctioned and disbursed.

Thanks and regards



Aug 6, 2016

on the subject of Bank loans, i would like to share experience of of my friend who was independent Director in PSB.this relates to period 15/16 years back.

he told me that the board meeting papers are given just 7/8 days before date & they are Voluminous. there is pre meeting dinner previous night., where actually the subjects are decided. thereafter at meeting there is hardly discussion on any subject.

i do not situtions has changed even now


dr.surya prakash agarwal

Aug 1, 2016

Sir, RBI should give attention to the public sector banks on priority without any political interfrence in operations and exemptions. Prior governments used banks for their political interests. In providing loans,there should not be any exemption like Rin mafi yojna to any one industrialists/farmers/students. Public sector banks should operate under RBI guidelines only. People under poverty line(approx.30% of total population) of INDIA are eagarly looking for financial support from banks and hence for the growth of Indian economy it becomes more important to continue with public sector banks under proper regulations instead of selling.The legacy problem of NPAs must be resolved as quickly as possible so that the banks can focus on resuming lending.


Jayant gharpure

Jul 29, 2016

I feel presentation of write off &recovery in particular FY is not correct. Write offs must be for number of past year/s, so also recoveries.
So for comparison to be made these data should be adjusted every year.

There can not be recovery of write offs in same FY


Satyanarayan B M

Jul 29, 2016

If there is data on politically influenced financing by banks, it will be worthwhile looking-at!
Political intervention in selecting Executive directors and Managing directors of public sector banks is the root-cause of bad loans! Our Finance Minister feels the Interest rate on Savings accounts in banks appear to be high!

Banks have fleeced the savings account holders over the years by paying much lower interest rate and method of calculation of such interest and its credit was completely adversary to the interest of depositors! Can you imagine, the banks were paying interest on 'minimum balance in savings a/c between 10th & last day of month' and such interest amounts were credited once a year!

Interest application in loan accounts is monthly (compounding on monthly basis), where as on fixed deposit such a compounding is on quarterly basis - another issue against the interest of depositors!


Sundaravaradan S

Jul 29, 2016


We need to find-out year-wise loan given (which has become stressed, now), to whom? Under whose Govt.?
Why nobody is talking about crony-capitalism of Congress Govt.????? Of course, the prsence Govt. moves towards selling Banks & eliminating NPAs, totally...(you think that is bad for the the common man...?)

Let us be clear...Who did the Crime? What need to be done, now!


Sundaravaradan S

Jul 29, 2016

Some Q & A by Quora......

For how many years will Modi be the PM for India?
Nischal Prasad
Nischal Prasad
I think modi is setting a standard for the future PMs to come. It is really hard to match the energy and work ethic of the current Indian prime minister.

Let's look at the alternatives

1)A much younger (supposedly) Congress leader has done nothing but blame the prime minister for everything under the sun. I mean come on, you were sleeping when your party was in power. Now everything is MODIs fault? Come on!

2) The not so aam aadmi who is sort of an expert in telling that someone else is not letting him work.Wow dude, there were plenty of other CMs before you who did their job and never complained. I have seen 5 year old kids who complain a lot less than you. I have an advice "Mooh band kaam chaalu"

3) oh wait, there are no alternatives.

Surprisingly people are not even bothered as to what the current govt is upto,they have fallen trap to the trp driven news hungry media. I think communication is the key, which is where modi govt is lagging. I think the PM should just take time off to propagate what he is upto. I also believe it is our duty as citizens to educate people on the current policies and actions of the govt.

I firmly believe that 2019 will also be the year of modi sarkar.
Written Jan 24 · View Upvotes



Jul 29, 2016

It is absolutely correct. The present Banking system is corrupt & induced by politicians. The customer service of public sector banks is deteriorating day by day. In the name of computerization their services were so worst, no body take care of customer grievances. The remedy for the same is to privatize them, only then the bank people come across the difficulty suffered by the public for which their salary & increments should be stopped for their inefficiency.



Jul 29, 2016

All huge loans that have turned bad are well protected by the powers. The higher ups in banks are also happy in this scenario because no body has really bothered to investigate why the collaterals were not enforced at the right time n if, in the first place, were there any genuine collaterals at all. Huge loans have huge safeguards but were they really followed? Public must appreciate the fact that bank's money loss finally means public money loss. Impart prompt justice against the big defaulters n the people who have shielded them.


Rajeev Arora

Jul 29, 2016

I have yet to see any source of information, starting with the finance minister, RBI, etc. clearly spell out the names of the people responsible for this mess. Will anyone ever be punished ...

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