What is the issue?
- The Centre recently announced the details of recapitalisation plan for PSBs. Click here to know more.
- While the move has been largely viewed with optimism, there are serious concerns that demand a reassessment.
What are the benefits?
- Capital infusion reinforces the Centre’s commitment to support weak public sector banks.
- This will certainly help them meet the regulatory capital requirement.
- ON the other hand, it will provide growth capital to the slightly better performing banks.
- Also, the deadline for resolving the first set of large accounts under IBC is fast approaching (by March, 2018).
- Given this, capital infusion will give more space for the banks to clean up their balance sheets.
What are the concerns?
- 46% more capital has been given to the banks under the RBI’s prompt corrective action.
- This is owing to their weak capital and higher NPA levels.
- This is against the general perception that bigger and better performing banks would be rewarded with more capital.
- The plan evidently offers a larger share of capital for weaker banks.
- This, in a way, denies the growth capital to more deserving banks.
- Notably, weak bank’s capital ratios have increased beyond the requirement to meet the regulatory threshold.
- The Centre's approach is only indicative of higher bad loan provisioning in the coming quarters.
- Besides, the recap plan makes some relaxations to existing systems.
- These are in relation with:
- closer monitoring of big-ticket loans
- identifying niche areas where a bank has strengths
- restricting corporate exposure to 25%
- a new performance management system
What should be done?
- The capital offered should be able to meet the government’s service priorities.
- This, in particular, applies to smoother credit flows to small businesses.
- The constitution of the Banks Board Bureau was a welcome move in the governance of PSBs.
- But impact thus far has been very minimal.
- PJ Nayak committee’s recommendations including giving more autonomy to bank boards need to be implemented in true spirit.
- Thus, a sustained solution lies in taking forward the structural reforms.
- This is even more crucial for the current recapitalisation exercise to pay favourable results.
Source: Business Line, The Hindu
