What is the issue?
Recapitalisation of banks needs to be done with a clear and structured foresight.
What is recapitalisation?
- Re-capitalisation of banks means infusing money into the banks in order to give them the liquidity needed to carry out lending and other banking functions.
- On that note, it is a positive sign that the RBI, as the sector’s regulator, and the government, as the principal shareholder of these banks, are in consultations on the problem.
- Discussions on the question of time-bound capitalisation of the banks are needed.
Why did the liquidity crunch arise?
- The banking sector has recently taken a hit due to the build up of gross Non-Performing Assets (NPAs) which led to liquidity crunch.
- NPAs stood at almost a tenth of the total bank loans at the end of the last financial year.
- It has also been observed that NPAs are concentrated in Public Sector Banks.
- Some PSBs have NPAs in the range of 15 to 24 per cent.
- This has resulted in slowdown in bank’s lending to industry, thus holding back private investment in economic growth.
- The prevalence of bad loans also presents a serious systemic risk to the financial system.
What are the priorities in this regard?
- NPA Problem -Settling the existing bad loans might require banks to write off a considerable sum, which would affect their capital provisioning, thereby requiring re-capitalisation.
- But, given that NPAs are over Rs 6 lakh crores, a straightforward recapitalisation of PSBs would greatly strain the government’s fiscal position.
- Furthermore, in the absence of deep governance reform, it is far from certain that the problem of NPAs will not recur.
- It is essential, therefore, that the structure of any bank bailout be such that future bad behaviour is not incentivised.
- Disinvestment - Besides capital infusion by the government, raising capital from the market by dilution of government equity and sales of non-core assets are also being considered.
- Dilution of government equity must be accompanied by a reduction in effective government control to make it an attractive buy for the private sector.
- Incentive Mechanism -A mechanism to hold poor performer banks accountable and incentivising good ones is needed.
- Such an approach will produce a stronger public sector banking system.
- Certainly, India cannot afford to throw good money to address the problems of bad money.
Source: Business Standard
