Need to swiftly restore public sector bank health: RBI dy governor

A primary cause for the recent slowdown in our growth is the stress on the banking sector’s balance-sheet, said Viral V Acharya

GN Bureau | September 8, 2017


#Reserve Bank of India   #banking   #Viral V Acharya   #public sector banks  
Viral V Acharya
Viral V Acharya

“We need soon a much more powerful plan – “Sudarshan Chakra” – aimed at swiftly, within months if not weeks, for restoring public sector bank health, in current ownership structure or otherwise,” said Reserve Bank of India deputy governor Viral V Acharya.
 
Addressing the 8th RK Talwar Memorial Lecture in Mumbai on Thursday, Acharya said that a whole ecosystem is evolving around the Insolvency and Bankruptcy Code (IBC) and the Reserve Bank’s steps have contributed to this structural reform.
 
“The government of India has been infusing capital on a regular basis into the public sector banks, to enable them to meet regulatory capital requirements and maintain the government stake in the PSBs at a benchmark level (set at 58 per cent in December 2010, but subsequently lowered to 52 per cent in December 2014).
 
“In 2015, the government announced the “Indradhanush” plan to revamp the public sector banks. As part of that plan, a program of capitalisation to ensure the public-sector banks remain BASEL – III compliant was also announced. However, given the correctly recognised scale of NPAs in the books of public sector banks and the lower internal capital augmentation given their tepid, now almost moribund, credit growth, substantial additional capital infusion is almost surely required. This is necessary even after tapping into other avenues, including the sale of non-core assets, raising of public equity, and divestments by the government,” said Acharya. 
 
The Cabinet Committee on Economic Affairs has authorised an alternative mechanism to take decision on the divestment in respect of public sector banks through exchange-traded funds or other methods subject to the government retaining 52% stake.
 
“Synergistic mergers may also be part of the broader scheme of things. The Union Cabinet has also authorised an Alternative Mechanism for approving amalgamation of public sector banks. The framework envisages initiation of merger proposal by the Bank Boards based on commercial considerations, which will be considered for in-principle approval by the Alternative Mechanism. This could provide an opportunity to strengthen the balance sheets, management and boards of banks and enable capital raising by the amalgamated entity from the market at better valuations in case synergies eventually materialise,” he said.
 
“All of this is good in principle. There are several options on the table and they would have to work together to address various constraints. What worries me however is the glacial pace at which all this is happening,” added Acharya.
 
Acharya, who was a professor at New York University Stern School of Business before taking up the RBI assignment, said: “…I fear time is running out…The Indradhanush was a good plan, but to end the Indian story differently, we need soon a much more powerful plan – “Sudarshan Chakra” – aimed at swiftly, within months if not weeks, for restoring public sector bank health, in current ownership structure or otherwise.”
 
He went on to say that a primary cause for the recent slowdown in our growth is the stress on the banking sector’s balance-sheet, especially of public sector banks.
 
The stress in bank assets has been mounting since 2011 and has now materially crystallised in the form of non-performing assets (NPAs). “Some banks are under the Reserve Bank’s Prompt Corrective Action (PCA) having failed to meet asset-quality, capitalisation and/or profitability thresholds; others meet these thresholds for now but are precariously placed in case the provisioning cover for loan losses against their gross non-performing assets is raised to international standards and made commensurate with the low loan recoveries in India.”
 
He added: “When bank balance-sheets are so weak, they cannot support healthy credit growth. Put simply, under-capitalised banks have capital only to survive, not to grow; those banks barely meeting the capital requirements will want to generate capital quickly, focusing on high interest margins at the cost of high loan volumes. The resulting weak loan supply and the low efficiency of financial intermediation, have created significant headwinds for economic activity.”
 

Comments

 

Other News

Uneasy calm in riot-torn Delhi

No untoward incidents have been reported from the parts of the capital that witnessed communal riots this week, but the peace Thursday morning was still tentative and a number of those hospitalized for injuries were battling for life. Clashes began Sunday evening and engulfed parts of northe

Modi-Trump show gives India-US ties new dynamism

In the more than 40 hours of stay in India during his two-day visit, US president Donald Trump exhibited his talents as a politician and also a showman with acumen to provide the Indian audience and Americans back home enough opportunity to stay glued to his activities on the Indian soil. Whether it be his

People-to-people relations the real foundation of Indo-US friendship: Modi

On the second and last day of US president Donald Trump’s India visit, prime minister Narendra Modi said the real foundation of Indo-US friendship is people-to-people relations. Trump, meanwhile, sidestepped the contentious issues of the protests against the new citizenship law, telling a joint press

America loves India, America respects India: Trump

America loves India, America respects India, said US president Donald Trump as he and first lady Melania Trump began their short visit of India from Ahmedabad on Monday, welcomed by prime minister Narendra Modi. The US president was in Ahmedabad, in Modi`s home state of Gujarat, to attend th

2020 is crucial for CPSE: Arjun Ram Meghwal

"The year 2020 is going to be a significant year for India and especially for Central Public Sector Enterprises (CPSE), "said the Arjun Ram Meghwal, Minister of State for heavy industries and public enterprises on Wednesday at the 7th PSU Awards and Conference organised by Governance Now on 19th

Vice President springs surprise, speaks in 22 languages

Highlighting the importance of preserving, protecting and promoting Indian languages, the vice president of India, Shri M Venkaiah Naidu spoke in 22 languages at an event to mark International Mother Language Day in New Delhi. He urged all the citizens to take a pledge to promote mother tongue and also lea



Archives

Current Issue

Video

CM Nitish’s convoy attacked in Buxar

Opinion

Facebook    Twitter    Google Plus    Linkedin    Subscribe Newsletter

Twitter