Most Public Sector Banks (PSBs) are abuzz after the latest announcement by finance minister Arun Jaitley. In what is being referred to as a “big bang reform”, the government recently announced its intentions of strengthening the ailing public banking system and unveiled Rs. 2.11 lakh crore budget, a two-year roadmap for strengthening NPA-hit public sector banks, which includes recapitalisation bonds, budgetary support, and equity dilution.
"Recapitalisation of all the public sector undertaking (PSU) banks was the need of the hour and this will also take care of capital requirement of risk and growth,” said Rajnish Kumar, Chairman, State Bank of India (SBI). In an interview to CNBC-TV18. The capital infusion of PSBs entails mobilisation of capital to the tune of about Rs. 2,11,000 crore which will be spread over the next two years. This will be undertaken through budgetary provisions of Rs. 18,139 crore, and recapitalisation bonds to the tune of Rs. 1.35 lakh crore, with maximum allocation in the current year,
The aim of this capital infusion, in addition, to improve the financial conditions of PSBs is to support credit growth and job creation. In what seems to be one of the biggest fiscal policy to be passed this year, a Keynesian push if you may, the government hopes that the move will spur employment, given that jobs have plummeted in recent times with the slowdown in the economy. One government estimate pegs the creation of 142 million-man days of jobs through this move.
One way that PSBs have over the years have an impact on job growth has been by ensuring government schemes aimed towards building entrepreneurship capabilities are successful. According to the SBI research report Ecowrap, as PSBs have 70 percent market share in the banking space and this will help the government to gear-up lending to MUDRA scheme, which in turn can help generate a significant number of employment opportunities in the country. “Till now Mudra loan has been distributed to around 9.18 crore units and around 80 percent of these loans have been sanctioned to women entrepreneurs,” the report said. It further said that Mudra since its inception has generated 1.68 crore incremental jobs and total around 5.5 crores of jobs mostly in industrialised states like Karnataka, Tamil Nadu, and Maharashtra.
The growth and impact of MUDRA scheme
The MUDRA or the Micro Units Development & Refinance Agency Limited was launched along with the Pradhan Mantri MUDRA Yojana (PMMY) in the year 2015 through which the government directed banks to increase their lending to micro enterprises engaged in manufacturing, processing, trading, and service sector activities, for a loan up to Rs. 10 lakh. These loans further were divided into three categories to facilitate the process of loan payment. It was advised that the loan may be given in the following three categories: loans up to Rs 50,000 were to clubbed under Shishu, Rs 50,000 to Rs 5 lakh under Kishor, and Rs 5 lakh to Rs 10 lakh under Tarun.
This scheme, like many, has been a bag of mixed blessings when it comes to its ability to promote job growth. Although there have been claims on how the jobs market has been positively impacted since the inception of the scheme, it is often difficult to pinpoint the exact the change as there is no official data available on the impact of the MUDRA scheme on the job market.
What has been clearly articulated though is that the credit provided under the scheme has already exceeded the Rs 1.22 lakh crore target set for FY 2016-17 with the target for 2017-18 being set at Rs 2.44 lakh crore as mentioned by Arun Jaitley, the current Finance Minister in his Budget speech.
However, according to data from the agency’s website 99.6 percent of all loans disbursed by non-banking financial corporations (NBFC) under the MUDRA scheme has been in the Shishu category, with a ticket size of less than Rs 50,000, in financial year 2015-16, The picture is not very different in the private bank and micro-finance institution space, with 87 percent and 93 percent belonging to the same ticket size, respectively. This, although significant in its own right, does little by way of improving the jobs scenario that the scheme hopes to address.
The prospective changes
Schemes like PMMY are aimed at creating an alternative by focusing on creating the right conditions to allow micro enterprises to grow.
There seems to be clear intent to push many towards the route of self-employment as the government realizes that creating jobs for the growing working population by traditional means seems to be a daunting task. But in order for schemes like PMMY to do so, it has to fix certain financial gaps that restrict it to from being more effective.
For example one of the problems with the scheme according to a BloombergQuint report arises due to the nature of MUDRA as a financing agency. MUDRA as an agency currently cannot lend since it has not yet been given a bank status. What it does is offer to refinance but only to those banks that are willing to lend to this segment at base rate. This poses the first challenge. Small ticket business loans are a relatively high-risk category and typically a bank would not lend to this segment at the base rate. Thus it becomes problematic if public sector banks don’t turn up to support the needs of PMMY.
And one way to ensure that this happens is by improving the financial conditions of state sun banks, for which the step of recapitalization is a necessary one. As the RBI governor notes, “Emphasising that a well-capitalised banking and financial intermediation system is a prerequisite for stable economic growth, the Governor said economic history has shown repeatedly that it is only healthy banks that lend to healthy firms and borrowers, creating a virtuous cycle of investment and job creation.” But over time hopefully, this move is strengthened by bringing in structural changes within PSBs as a lot rides on their healthy performance. Else, in the long run, nothing would have fundamentally changed.