In a recent development, the government has decided to release funds for capital infusion amounting to Rs. 22,915 crores. This is a part of the overall fund allocation declared earlier this year, during the budget session of the parliament where the total amount at the time was kept at Rs. 25,000 crores. This capital infusion is divided between 13 Public Sector banks which have been trying to restructure themselves in order to maintain a healthy portfolio given the recent debacle of Non-Performing Assets.
These NPAs are in the form of loans given to various institutions and companies whose principal amount or interest has become past due. In other words, companies who cannot or will not (for a variety of reasons) meet their financial commitments to those banks.
Some of the companies involved are –
Reliance Group (Anil Ambani) –
The Reliance Group alone owes over Rs. 1,20,000 crores with interest payments of above Rs. 8,000 crores. At the same time, the total earning before tax is little above Rs. 9,000 with many of the companies under the group not earning enough to even service the interest of the loans. In order to meet the obligations, the group has put many assets on sale, including 44,000 telecommunication towers, optical and communication infrastructure from its flagship firm, Reliance Communications. The overall valuation is at a grim Rs. 13,000 crores, putting the future of the company in turbulent waters.
Essar Group –
With total debts mounting over Rs. 1,00,000 crores, the group has been forced to look for a 50% owner of their Vladinar refinery for Rs. 25,000 crores. The same is applicable for their steel concerns, with 49% stake pegged to get them another Rs. 25,00 crores.
Adani Group –
The total debt amount for this group stands at roughly Rs. 96,000 crores. With Standard Chartered calling in their $2.5 Billion loan last year and the State Bank of India refusing to give a loan for $1 Billion despite signing an MoU, the financial troubles seem to have just started for the group.
Reliance Industries –
Mukesh Ambani’s Reliance Industries has the highest amount of debts in this entire fiasco, amounting well over Rs. 1,80,000 Crores, mainly due to the pricey roll out of their flagship communications project Reliance Jio (Increase to Rs. 1,50,000 crores from Rs. 65,000 crores in debts). While the company has the best credit ratings in the sectors, the stress of the large loans may very well put the company into a cash crunch in trying to meet their various financial obligations.
The banks which have received the government cash infusion are –
State Bank of India – Rs.7,575 crore,
Indian Overseas Bank – Rs.3,101 crore,
Punjab National Bank – Rs.2,816 crore,
Bank of India – Rs.1,784 crore,
Central Bank of India – Rs.1,729 crore,
Syndicate Bank – Rs.1,034 crore
UCO Bank – Rs.1,033 crore.
Canara Bank – Rs.997 crore,
United Bank of India – Rs.810 crore,
Union Bank of India – Rs.721 crore,
Corporation Bank – Rs.677 crore,
Dena Bank – Rs.594 crore
Allahabad Bank – Rs.44 crore.
Long term prospects for the banks concerned look good mainly because of them being government owned banks which allows for a sense of security in their future. This also allows more probability of these institutions to be able to raise more capital infusion in the future if such a need arose (though that would be disastrous)
In the short term, investors in the stocks of these banks can expect fluctuation in stock prices as the overall investor confidence has been shaken. While they may continue to operate and transact, their overall credibility has taken a severe beating, making them the ideal stocks to be picked up at what may very well prove to be the lowest point in the coming years.
The effect on the overall economy seems to be a bit more complicated. This is due to the complicated nature of the market system and the banking system and also the ways and means for these institutions and their various obligations, both to the government and their own balance of payments.
Short term – with the re-capitalisation, there is expected to be a rise in demand led inflation, with banks and companies trying to consolidate their assets and liabilities. While this may have a positive effect on the investment (and by domino effect) manufacturing and other sectors, it would be a thin line to balance between a healthy growth rate and a debilitating inflation.
Long term – in trying to meet the obligations to the government, the banks would have to accordingly raise funds from a variety of sources which may leave the Indian economy vulnerable with such large amounts of debts on the market. Debts open in the market would have a tumble down effect on not only the concerned institutions and their assets, but also the overall economy with the effect on the tax regime also affecting the individual earnings of the people.
The above shows the deeply entrenched trouble in our financial system, which needs great amount of care and concern being the 3rd largest economy in Asia and one of the fastest growing economies in the world. With the recent Brexit and the slowdown of the American economy; and the parallel expansion of the Chinese economic and military strengths, India must pull up its socks and sort this mess soon.
Ranveer Raj Bhatnagar