Without a major reform in financial sector in general and PSBs in particular, an aggressive capital infusion by the government should not become an alternative for better governance – Discuss.
Refer - Livemint
IAS Parliament 7 years
KEY POINTS
What is the need?
· Rs. 2.11 trillion recapitalisation plan has been proposed to boost PSBs.
· It is important to note that India is predominantly a bank-financed economy and would find it difficult to grow at a higher rate without the necessary support from the banking system.
· Infusion of capital will fast-track the resolution of non-performing assets and will help economic revival with the restoration of flow of credit to small and medium enterprises.
· At the same time, government should back bank recapitalisation with reforms in the financial sector.
· Giving banks extra capital was only one of the seven grand themes of the Indradhanush programme announced in 2015.
· The reform of the Indian banking sector—and especially the privatization of banks—should be the next step.
· Otherwise, banks will not take adequate precautions when they are lending when they know that the government will step in to help if the loans turn sour.
What should be done?
· It is to be ensures that the manic lending spree to influential industrial groups that took place on both sides of the global financial crisis is not repeated.
· The government should be selective about which banks get the additional capital on offer.
· The weaker banks should be given capital only to maintain their current operations.
· Meanwhile, the larger borrowers who have defaulted on loans should face the heat of the new insolvency law.
· Government needs to decide what proportion of the fresh capital will go for provisions against existing bad loans and how much is to be allocated for new loans.
· Even if recapitalisation bonds are kept out of the budget, they will still add to the government’s debt stock and increase the interest liability.
· It is also possible that international investors and rating agencies will look at deficit numbers after taking these bonds into account.
· Although resorting to recapitalisation bonds is not a desired outcome, it is perhaps the best that the government could have done in the given circumstances.
· The fact that recapitalisation bonds can be used for capital infusion should not become an alternative for better governance.
