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Sudarshan Chakra, Not Indradhanush, Needed For State-Owned Banks, Says Viral Acharya

Viral Acharya worried about lack of a concrete recapitalisation plan for state-run banks.

Viral Acharya, Deputy Governor, Reserve Bank of India (Source: BloombergQuint)
Viral Acharya, Deputy Governor, Reserve Bank of India (Source: BloombergQuint)

Reserve Bank of India Deputy Governor Viral Acharya said that the lack of an adequate recapitalisation plan is the Achilles heel of any effort to turn around state-run lenders grappling with mounting bad loans.

The story for Indian banks would have to end differently when compared with European or Japanese banks which were not adequately recapitalised by their respective governments in times of crisis, Acharya said in a speech delivered in Mumbai on Thursday. To achieve this, the country would need to come up with a “Sudarshan Chakra” plan, instead of the government’s Indradhanush plan initiated in 2015.

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.  
Viral Acharya, Deputy Governor, Reserve Bank Of India

Indradhanush is a seven-pronged plan to improve the capital health of state-owned banks. The government had allocated Rs 70,000 crore to be infused into public sector banks over four years up to March 2019 to ensure that they remain Basel III compliant. The central bank’s asset quality review of 2015, however, forced lenders to recognise non-performing assents and set aside provisions. As a result, bad loans of the Indian banking system nearly doubled since then to more than Rs 8.3 lakh crore by June.

Given the correctly recognised scale of non-performing assets on the books of state-run lenders and the lower internal capital augmentation due to tepid credit growth, substantial additional capital infusion is almost surely required, Acharya said. “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.”

Acharya said the central bank’s efforts to recognise bad loans, like the asset quality review and the recent push towards using the Insolvency and Bankruptcy Code, gave him comfort.

The realisation that we have put in place a process that not just addresses the current NPA issues, but is also likely to serve as a blueprint for future resolutions, becomes the bliss of my solitude! A whole ecosystem is evolving around the IBC and the Reserve Bank’s steps have contributed to this structural reform. I smile and rest peacefully at night with this thought...
Viral Acharya, Deputy Governor, Reserve Bank Of India

The government’s push for consolidation in the public sector banking space could also benefit the sector, by allowing better governance and allocation of capital, he said.

Yet, the lack of a concrete recapitalisation plan for banks to deal with the aftermath of these various measures is an issue which makes him restless. “...how will they (banks) withstand the losses during resolution and yet have enough capital buffers to intermediate well the huge proportion of economy’s savings that they receive as deposits; can we end the Indian story differently from that of Japan and Europe?,” he asked.

Acharya pointed out that under-capitalised banks have capital only to survive, not to grow. The 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, the RBI deputy governor pointed out.

While Acharya did not make any firm suggestion on a recapitalisation plan, he did mention a few directions which the government could explore. One question he raised was if it would be possible to sell the sizeable deposit franchises in weak banks to private entities. According to the central banker, such a sale could help in continuing the deposit franchises as strong entities rather than those being treated under the RBI’s prompt corrective action plan.

Another question Acharya asked was if the government could immediately reduce its stake in all public sector banks to 52 percent, so that the lenders could start raising more capital from the market. He also wondered what could the government and the regulator do to help banks where even such a drastic reduction in state ownership could not help much?

The deputy governor feels that while there are multiple options available with the regulator and the government on tackling the issue, he was worried about the “glacial pace” at which things were moving.

At an event last month, RBI Governor Urjit Patel had announced that the central bank was working with the government on creating a new recapitalisation plan which would involve measures such as mergers. He did not divulge any details.