from nationalized banks both as recorded on their books, and after subtracting the income from recapitalization bonds. We take the difference between these two numbers as the implied sub- sidy from the government to the nationalized banks. To calculate this number for other years, we assume that the ratio of subsidized income (1797 crores in 1998-1999) to cumulative capital contributed by the central government (19,803 crore in 1998-1999) was constant throughout the nineties, at approximately 1757/19,403=9 percent. Taking the total reported capital investment in each year from 1992 to 2000 (again from the 2000-2001 Trends and Progress), and adjust- ing for inflation, gives an estimate of the subsidy from recapitalization of approximately 13,607 crore. Combined with 15,421 crore of written down capital, this amounts to a recapitalization cost to the government of approximately 290 billion rupees.
This number requires three important adjustments. First, some of the weakness from the nationalized banks balance sheets may come from the assets of the failed private banks that were merged with the nationalized banks (this amount can be bounded above by the figure derived above, 45 billion rupees—quite clearly, public sectors have many bad loans of their own). Second, and probably much more importantly, this represents the cost up to the year 2000. It is an open question how long it will take for the banks to return this capital to the government. Finally, it is also possible that the public sector banks will be unable to return the entire amount of capital subscribed by the government.
Thus, the most favorable accounting for public sector banks (in which they wean themselves completely from recapitalization income starting in fiscal year 2004, and are absolved of the entire value of the 45 billion rupees of the failed private banks) gives a total cost of recapitalization of public banks of approximately 300 billion rupees.45 A more realistic assessment might credit them for only one-half the value of the losses, and assume that recapitalization bonds will be held for ten more years, until 2014. This would give an approximate bail-out cost of 540 billion rupees. 46
Comparing the figures requires attention to the relative size of the two bank groups. A
rough estimate of the ratio of deposits of nationalized banks to private sector banks over the 45 Starting from the figure of 290 billion rupees., we add the approximate subsidy for 2000-2003, 60 billion
rupees., and subtract 45 billion rupees of losses possibly imparted by the private sector banks. 46 We take the figure of 290 billion through 2000, subtact a 22.5 billion credit from the failed private sector
banks, and add on a subsidy of 1950 crores per year for the next decade, giving us a final figure of 540 billion.