Three Factors To Consider Before Bank Recapitalisation
Arvind Subramanian says three factors needed to be considered before PSU banks are recapitalised.
Chief Economic Adviser Arvind Subramanian today said three factors needed to be considered before public sector banks are recapitalised: whether to inject funds before cleaning up balance sheets, shrink the number of unviable banks and privatise lenders once they turn healthier.
The government on Tuesday announced its plan to infuse Rs 2.11 lakh crore into state-run lenders, of which Rs 1.35 lakh crore would come from recapitalisation bonds and the rest from budgetary support and market borrowings.
The question confronting the recapitalisation strategy is whether to infuse funds in banks by leaving the stressed loans on their balance sheet or taking them off, Subramanian said. Hiving off bad assets will likely make the private sector become owner or equity-holder in such banks, he said.
The other benefit would be that it would no longer keep bank management distracted by having to deal with stressed assets, Subramanian said while addressing a gathering at New Delhi’s Khalsa College.
Stressed assets of banks are more than what they are claimed to be, he said. “The amount of stressed assets always and everywhere is at least 10-20 percent more than what it is always and everywhere claimed to be.” Call it the “Subramanian law of recognition”, he said.
The aim must be to “shrink or narrow” the scope of unviable banks. “…Recapitalisation must be selective and incentive-based, directing it to those banks where the bang for the buck in terms of new credit creation will be maximum,” Subramanian said.
The other possibility would be to recapitalise unviable banks only to the extent necessary to finance their current balance, while explicitly not providing for their growth, he said.
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Need 5-7 Big Banks
The chief economic adviser said India needs five to seven reasonably big banks, both public and sector, which are able to compete domestically as well as globally. He cited the example of China which has four large banks that are among the biggest in the world.
“...That doesn't mean we want few banks…that would reduce competition, but we don't want many banks either.”
The third important factor of privatising banks once they have cleaner balance sheets would be essential for having large public and privately owned lenders, he said.
“International experience suggests that effective regulation is an absolutely vital pre-condition to a sound and effective banking system, regardless of ownership structures,” he said in a written statement.
The conventional case for privatisation would be the benefits that it will derive from less political interference and politically directed lending. Freedom to recruit and retain personnel and procure from the most efficient sources would be other benefits of privatisation.
The Cost Of Recapitalisation Bonds
Details of recapitalisation bonds will be known in due course including whether they can be traded, if they will be counted towards the statutory liquidity ratio, or what will the coupon, Subramanian said.
Government issues recapitalisation bonds to banks in lieu of capital. Lenders then subscribe to these bonds as part of their investment portfolio. The money raised by the government will then be used to infuse fresh equity into banks.
The fiscal cost of issuing Rs 1.35 lakh crore recapitalisation bonds is the interest payment of about Rs 8,000-9,000 crore, Subramanian said.
“But cost can be offset by the confidence impact of addressing the critical economic bottleneck, thereby increasing credit supply, private investment and growth. The rest is all accounting,” he said.