RECAPITALIZATION OF BANKS

In any Nation, it’s the responsibility of its major stakeholders/owners of an organisation to sort out the issues faced by it and to make it run smoothly without incurring losses, especially during troubled times .To deal with these, sometimes policy changes are required, sometimes structural changes are more viable and sometimes infusing extra capital is necessary to counteract the losses and put the organisation on right track.

Here, Govt. of India being the major stakeholder of Public Sector Banks (PSB), it’s the obligation of the government to infuse extra capital in order to overcome the bad loans and deteriorating asset quality faced by these PSBs. This infusion of additional capital into the organisation by the stakeholders is called “Recapitalization”.

Public Sector Banks need recapitalization very badly to overcome the stressed assets, NPAs, etc. that were pulling them down to heavy losses, as it is evident by the financial results April-June Quarter of 2017-18. Banks further need to clean up their balance sheet otherwise they will not be able to lend further.  Apart from this, Public Sector banks also need to maintain Capital Adequacy Ratio (CAR) which determines the capacity of the bank to handle risks such as operational and credit risk maintaining this ratio is required to fully implement Basel III norms by March 31st, 2019.

The present government has promised to recapitalise the banks which are making losses and merge some of the weaker ones with sound banks by launching Project Indradhanush2.0. But this is not enough to deal with a recurring problem where banks are floundering every decade. Recapitalisation should be accompanied by stronger and much deeper banking reforms or else hapless taxpayers will soon be presented with another bailout bill. The primary cause for the present state of affairs in Public Sector Banks is government’s majority stake in them. This has been forcing the Public Sector Banks to deal with an additional regulatory layer in the form of the Finance ministry. Taking commercial decisions viable for the bank to make profits has taken a back step with the fear of multiple investigators scrutinising those commercial decisions that take place in the bank .Government ownership has initially increased the quantity, and but has substantially lowered the quality of financial intermediation. As the majority stakeholder of the PSBs is the government itself, the lending process sometimes takes place keeping the politically expedient goals in mind. This has led to bailouts when such lending goes bad.

Previously it was proposed by the Finance Minister of the same government 17 years back, that by lowering government’s stake to 33% we would be able to remove some constraints public sector bankers work under. Also, government can go forward with P J Nayak Committee’s recommendation. Accordingly a separate “Bank Investment Company” (BIC) can be established giving it functional autonomy and government transferring the shares to it. Then BIC can become the parent company and all the PSBs coming under this one company. Also by liberating these banks from the scrutiny of the RTI-CAG, managers would be able to take bold business decisions that can promote the growth of the bank. This would also provide bankers more space to be nimble and take timely decisions giving better results in the overall functioning of the bank. This will improve the asset quality and reduce the bad loans. It is high time for our Finance Minister Arun Jaitley to implement this plan. Apart from that the government should also allow banks to rework their recruitment practices and increase the pay scales as they need to attract the best talent in the job market.

B S B Vamsi Krishna

Secretary – CC & PR

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