Government’s Lifeline For Banks Won’t Hurt Fiscal Consolidation, Says Bimal Jalan
Hold the PSUs responsible for governance, says Bimal Jalan.
The positives in the Indian economy can support the government big-ticket recapitalisation of state-run banks, according to former RBI Governor Bimal Jalan.
And if the government were to slightly exceed its fiscal deficit target of 3.2 percent of the gross domestic product for financial year 2017-18, that would not come as a big setback for the economy, Jalan said. “Under these circumstances, whatever we can do, we should do.”
The government today announced an allocation of Rs 2.11 lakh crore over two years for the recapitalisation of public sector banks. The plan is intended to help banks make adequate provisions against bad loans and revive lending.
The next step, Jalan said, is to make sure public sector banks are made accountable and “responsible for governance” to make sure that NPAs are reduced substantially.
There is substantial autonomy for PSUs to manage the resources that they have, in a way that in the future we don’t get into NPAs of this order.Bimal Jalan, Former Governor, RBI
Here are edited excerpts from the interview.
There were two schools of thoughts, one was that we have thrown enough money at PSU banks, and not all of it has paid off, so let them fend for themselves. But you were in the other camp which said PSU banks are still very important and must be recapitalised, although perhaps with a reform.
Absolutely. I am very glad with what the finance minister has announced today. They [PSU banks] need to be recapitalised. And then you look back and see why NPAs rose to this point and why you had to wait 2-3 years to try and meet the amount of capital that the PSBs require. This is retrospective. One has to examine and then find the reasons that can be handled well in advance rather than after a couple of years as it were.
What do you make of the modalities? This is being done largely by recapitalisation of bonds. The purists would call it financial engineering.
You can call it anything, but this is the way it would go. In the sense that there are government bonds which are being floated, and the fiscal deficit at the moment is low. Look at the positives we have in the economy today, we have foreign exchange which is enough to meet any pressure on our foreign exchange resources and so on and so forth. Similarly, the exchange rate is stable which is very good, inflation is low, and then the investment is high. Under these circumstances, whatever we can do, we should do.
Are you of the view that this will not add to the fiscal deficit?
Our fiscal deficit at the moment from the historical point of view is very good, and it meets the FRBM targets and so on. Now supposing instead of 3.2 percent it is 3.3 or 3.4 percent, does it matter to the economy? No.
This is the position we have to take. Don’t go into the second digit, try and figure out what the fiscal deficit should be. The FRBM had announced a certain target, which the government has met, but if required – to recapitalise banks, PSUs and to increase investments – we have to do it. In view of all the other positives we have in the economy today, we can handle it.
If you had to put together a list to ensure that the capital is now well utilised, what would those reforms be?
I can’t say what the reforms would be, but I can say what the most important thing is to hold the PSUs responsible for governance. In the sense that, we know what the PSUs have to do, priority sector lending etc. So PSUs have to be accountable. And you have to ask yourself, why did NPAs rise to the level they did.
And this is a larger question in the sense that, there is substantial autonomy for PSUs to manage the resources that they have, in a way that in the future we don’t get into NPAs of this order.
Could this have been done earlier?
Let’s not get into this hypothesis now. It has now been done. The measures that have been taken, are most welcome. I think this would help the economy grow faster, it might help the bank lend the kind of money that is required for investments to increase. I think these measures are very positive and we should take advantage of all the resources and positives we have in the economy today, to try and make sure that NPAs are reduced substantially, and fiscal deficit doesn’t increase beyond a point. We are at an advantageous position now. I am glad what has happened.
Is this the time to at least go in the direction of a bank investment company? We were talking about governance reforms and autonomy. Should the government at least start working on a plan where it can transfer its ownership to a bank investment company? Distance itself a bit, sir?
That’s only a process. What does the bank investment company do? That different banks should have the autonomy rather than the ministry deciding what they should be doing. There are different ministries involved which decide on policy. And if we want NPAs to be reduced, that is the policy. And let each bank be held accountable, to perform in a way that NPAs are accountable. And if they have debts and so on, they don’t lend more, that is for them to decide. And we should give this autonomy to the government body of the PSUs and make them accountable for performance.
Watch the full interview here.