Call it recapitalization by issuing bonds.

The government just announced a plan to transfer $32 billion, equivalent to Rs 2.11 trillion, to public sector banks to cover a portion of the bad loans on their books. Analysts say that banks need an additional $40-65 billion to meet capital adequacy ratio under Basel III by 2019. The government is seeking help from the Reserve Bank to postpone meeting these requirements to a later date. That will have all sorts of repercussions on bank ratings and bond yields. Total bad loans at banks is estimated at $153.5 billion, or Rs 10 trillion. The government has passed an Insolvency and Bankruptcy Code which will empower creditors to remove existing management, take over assets of a defaulting company and appoint insolvency professionals to sell those assets, to settle outstanding debts. However, in the first case under the new law creditors could recover only Rs 540 million out of a total of Rs 9 billion, just 6%, of the outstanding dues. Not just the crooks, even banks are not happy with the bankruptcy law because value of assets apparently drops precipitously, as buyers lower their bids with a view to acquiring cheap assets. Banks want to increase provisions for bad loans, but that will only increase the amount required for recapitalization. Not just government banks, even private banks tend to hide their bad loans, probably to prevent a drop in the prices of their shares, which would reduce the wealth of their managers. Trouble is, that the law has no teeth to punish cheats, said Kroll, a US-based risk consulting firm. "Unfortunately when there is a bad business, there is typically, an element of fraud," said Tadashi Kageyama, head of Kroll's Asia operations. "All the stakeholders; the banks, the government as well as borrowers, want to lift the bad loans as quickly as possible, but our question is who is going to investigate the fraud and who is going to be accountable." Horrible thought. Criminals, officials, civil servants and politicians are all making merry, so holding one person accountable may bring down many. This is unlikely to stem the rot because politicians use them to pay for dubious policies, to win elections, wrote M Sharma. How will the government pay for Rs 2.11 trillion without increasing its fiscal deficit, which is pegged at 3.2% this year, when it has spent 96.2% of it already? Apparently, 60% of the amount will be financed by issuing bonds, so it will not add to the deficit. But, that is merely a sleight of hand because it adds to total government debt and increases interest payment, wrote Aurodeep. The government says it will allow banks to lend for new business projects but capacity utilization is at 71.2% so there is no reason to add to capacity. But, it is taxpayer money, so it belongs to politicians. Or so they think.