Page 245 - ES 2020-21_Volume-1-2 [28-01-21]

228 Economic Survey 2020-21 Volume 1

deadline of FY2017. However, the gross NPAs in the Indian banking sector only increased
to 11.2% by FY2018. A massive surge in loan loss provisioning also occurred in FY2018 – a
year after AQR was supposed to make bank balance sheets healthy. As shown in figure 25, the
additional provisions doubled in FY2018. For instance, in FY2016 and FY2017, the Punjab
National Bank reported additional provisions at INR 18,145 crores and INR 15,881 crores,
respectively. In FY2018, the additional provisions increased to INR 31,459 crores. The rise in
provisioning depleted banks’ capital.

Figure 25: Inadequate identification of hidden bad assets under the AQR:
Sharp rise in provisioning a year after completion of the AQR

Source: Chopra, Subramanian, and Tantri (2020)

Under-estimation of required bank capital

7.38 The actual capital required by public sector banks significantly exceeded the amount that
the RBI seems to have estimated before the AQR. In the first year of the AQR, the total capital
infused into public sector banks was INR 25,000 crores with an intended plan of infusing INR
45,000 crore in the next three years under Mission Indradhanush. However, by the end of
FY2019, i.e. four years after the inception of the AQR, the government had infused INR 2.5
lakh crores in the public sector banks. The addition of capital amounted to 44.24% of the added
(gross) NPAs. Box 8 presents the regression results from Chopra, Subramanian, and Tantri
(2020) to show that banks, both private and public, did not recapitalize themselves adequately
after the clean-up. Consequently, the banks were left significantly undercapitalized. Recall that
RBI’s assessment in this context was that “the government support that has been indicated will
suffice… enough to take care of all reasonable scenarios.”