Government must recapitalise banks

While there’s a lot of concern over the non-performing assets of banks, as it’s a loss of your money and mine, there should be equal concern about the government’s need to infuse fresh funds into banks. The government is, after all, the majority owner of nationalised banks and there are several advantages to making them stronger. This is definitely so for stronger banks, not ones that have been reckless in lending and thrown caution to the winds. It should also be understood that much of the NPAs of good banks is due to lending to the infrastructure sector. This sector saw huge bottlenecks under the Manmohan Singh government, that led to many infirmities in the economy. Besides freezing thousands of crores, it left corporates strapped for cash, a situation several of them have been unable to get out of till today.

The RBI has also backed the government recapitalising banks. Outgoing RBI governor Raghuram Rajan has himself said it would rather give the government all its surplus funds and let it use that to re-capitalise banks, as the RBI wouldn’t wish to do this itself. The RBI, as the banking sector regulator, doesn’t want to be an owner of banks, which would result in a conflict of interest.

Union finance minister Arun Jaitley has been rather tight-fisted in providing finance to banks, and has agreed to `25,000 crore. Seen against the `1,40,000 crore that the banks are said to be wanting, this amount is a drop in the ocean. Perhaps Mr Jaitley has his reasons and the government certainly has many other priorities. The flip side, however, is the advantages that flow from capitalising strong banks. Banks, for instance, need a capital adequacy ratio of nine per cent in order to be able to lend, and if strong banks have to lend, particularly for infrastructure projects, they will have to be strengthened. Besides, it would enable them to clean up their balance sheets, for which they have a deadline that ends next year. All this would enable banks to contribute to growth. Today most banks are risk averse and do not want to lend for fear of increasing their non-performing assets, and this is evident in the weak pick-up in credit growth.

There is a view in the government that banks should go in for consolidation through mergers, but they can wait till the cows come home for this to happen as bank chiefs would be reluctant to give up their fiefdoms. In addition, strong banks would not like to take over weak ones. One hopes, therefore, that the government acts without any further hesitation in recapitalising the banks.

There is a view in the government that banks should go in for consolidation through mergers, but they can wait till the cows come home for this to happen as bank chiefs would be reluctant to give up their fiefdoms