Temporary healing

This refers to “Investors shun bonds of banks under PCA” (May 18). In an environment of investor distrust in the banking system, a drop in investment in bonds has compelled the Reserve Bank of India (RBI) to purchase the same from the market to create liquidity by way of open market operations. Mounting nonperforming assets (NPAs) contributed by poor advances recovery, injudicious lending and sizeable frauds have subjected public sector banks (PSBs) to colossal losses and a consequent fall in market image.

PSBs have, for long, symbolised security for the investor in view of sovereign protection. For the first time, even the government guarantee is being viewed warily by promoters who wish to study their liquidity ratings and credit worthiness before investing. The current scenario of inadequate liquidity and the lack of capital adequacy creates a hesitation to invest in the capital of PSBs. There is non-availability of core securities for PSBs in the primary market, namely Tier-1 capital, as investors are buying back bonds. Tier-1 capital is a must for a strong capital base to satisfy capital adequacy norms. Tier-2 investments or the secondary line of investment are also not readily available even when bond prices are low as these subordinate investors are wary of erosion of capital. This has, in many cases, restricted PSB's ability to lend and the RBI has accordingly laid constraints on some of them as part of its Prompt Corrective Action (PCA) measures.

The open market operations of the RBI will be a temporary healing measure to reinfuse confidence in investors and strengthen the capital base.

Gopinath Nair Kochi