Viral Acharya, CV Starr Professor Of Economics, NYU Stern School Of Business. (Image: BloombergQuint)

Indian Banking Sector Better Off With Fewer, Healthier Banks, Says RBI’s Acharya

Public sector banks can be merged as a quid pro quo to ensure timely capital infusion by the government, said Viral Acharya, deputy governor of the Reserve Bank of India (RBI). Speaking at an event in Mumbai, Acharya pointed out that cooperative banks and micro-finance institutions are providing adequate community-level banking which can allow for consolidation within public sector banks.

Acharya’s comments come only days after RBI governor, in a speech at Columbia University said, “It is not clear that we need so many public sector banks. The system could be better off if they are consolidated into fewer but healthier banks.” Government officials have also indicated that they are open to further consolidation in public sector banks but only after the pile of bad loans on the books of these banks is resolved.

Some of the advantages of such mergers, according to Acharya, would be synergies in lending activity and economisation of costs in the form of reallocation of branches. “Historically, bank stress of the order we face has almost always involved significant bank restructuring,” Acharya said.

While there is no explicit news of an imminent merger of public sector banks, the government has tested the waters of consolidation through the merger of State Bank of India with its five associate banks, which became effective starting April 1.

Mergers, according to Acharya, are one of the options available to public sector banks as an alternative to large amounts of recapitalisation money being spent by the government. While rating agencies have different estimates on public sector banks’ capital requirements till March 2019, they agree that the government’s proposed capitalisation will be insufficient.

Under its 2015 Indradhanush programme, the government proposed to infuse Rs 70,000 crore into state-run banks over four years. Rs 50,000 crore of this has already been utilised, while the remaining amount is to be infused into banks over fiscal 2018 and fiscal 2019.

To fix the capital shortage, Acharya believes that some healthier public sector banks should consider raising money from the markets, perhaps by issuing deep discount rights. “They must be required to do this to share the government’s burden of recapitalising banks,” he said.

Apart from this, Acharya said banks could consider asset sales, including loan portfolios and real estate assets. Another option, he added, would be to reprivatise some nationalised banks.

Perhaps reprivatising some of the nationalised banks is an idea whose time has come? All this would reduce the overall amount the government needs to inject as bank capital and help preserve its hard-earned fiscal discipline, which along with stable inflation outlook and the diverse nature of our growth engine, appears to have made India the darling of foreign investors at the present moment. We should grapple this macroeconomic stability to our shores with hoops of steel.
Viral Acharya, Deputy Governor, RBI

The deputy governor, who in is first public address, listed alternatives to the resolution of mounting bad loans, on Friday pointed out that the Indian banking system is worse off than its emerging markets peers in terms of allocating capital to provide for loan losses. He reiterated that the situation can no longer be ignored or dismissed.

A bank not keeping adequate capital buffer to absorb losses on its loans, that are more or less known to be arriving soon, is akin to not preparing to rescue with emergency a person who has slipped off the terrace of a skyscraper, and instead in the midst of his almost surely fatal descent, hoping that the laws of gravity would somehow freeze and work differently this time.
Viral Acharya, Deputy Governor, RBI