State-Run Banks Need ‘Decisive’ Recapitalisation, Says NK Singh
NK Singh. (Photographer: Nelson Ching/Bloomberg)

State-Run Banks Need ‘Decisive’ Recapitalisation, Says NK Singh

A “significant and decisive” bank recapitalisation plan is needed for the next five years if the government continues to be the sole owner of state-run lenders, according to NK Singh.

The huge public outlay, the chairman of 15th Finance Commission said in his address to All India Management Association, will be needed considering the erosion in their asset quality. Indian lenders extended loan moratoriums to borrowers and businesses affected badly by the Covid-19 outbreak.

The Financial Stability Report released by the RBI last week projects gross non-performing assets of the banking sector to rise to as high as 14.7% of total loans by March 2021.

Earlier this month, Reserve Bank of India Governor Shaktikanta Das had said the economic impact of the pandemic may result in higher non-performing assets and capital erosion of banks, and a recapitalisation plan for state-run banks is necessary.

Singh said apart from improving the health and autonomy of state-run banks, India should look at opening up the banking and insurance sectors. He said since the economy was liberalised in 1991, banking and insurance sector has been overprotected in terms of regulations.

To a query on whether state-run banks must be privatised, given that the government has already infused over Rs 3 lakh crore in them, Singh said the sector requires a fundamental relook as recapitalisation isn’t a “panacea”.

‘V-Shaped Recovery’

Singh said although April-June and July-September quarters may witness contraction, “there would be a very sharp V-shaped recovery not necessarily that anything fundamental will happen or may happen, but because of a lower base” in the next two quarters of the ongoing fiscal. Nonetheless, the fiscal as a whole, would end on a negative trajectory, he said.

The next year would see consequences of a global economic depression that would continue to cast a shadow, Singh said. From 2022-23, once the impact of base effect is done away with, we’ll get to know whether initiatives taken by the government help in achieving sustainable growth, he said.

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