Banking Sector Reforms

[op-ed snap] Capital idea? on banks recapitalisation plan

Note4students

Mains Paper 3: Economy | Mobilization of resources

From the UPSC perspective, the following things are important:

Prelims level: PCA framework

Mains level: Government initiatives for improving the state of banks


Context

Capital infusion in banks by the government

  1. The Centre has sought Parliament’s approval to infuse an additional ₹41,000 crore into public sector banks that are starved of precious capital to remain afloat
  2. Along with another ₹42,000 crore that is already budgeted for infusion, this tranche will take the total planned funds infusion into banks this year to ₹83,000 crore
  3. Adding the outlays since 2015-16 — when the exercise to enable PSBs to clean up their balance sheets by fully providing for and absorbing losses on bad loans began — the estimated aggregate capital infusion would come to over Rs 3 lakh crore

Motive behind the exercise

  1. The government’s claim is that recapitalisation will allow PSBs — especially those with large non-performing assets and facing lending restrictions under the Reserve Bank of India’s (RBI) so-called prompt corrective action — to resume normal banking operations, boosting credit growth necessary for overall economic revival
  2. As many as 11 public sector banks have been stopped from lending freely by the RBI under the PCA framework due to their poor financial health

Actual reforms required

  1. The roots of the bad loan crisis lay in these banks not being allowed to function as autonomous and board-managed entities
  2. By not linking recapitalisation to reform — which can happen only with the government’s stake falling to below 50 per cent and transferring even this to a separate holding company that would secure the former’s financial interests — the danger is of the seeds of the next crisis is being sown through imprudent lending
  3. It is important that the additional capital is not wasted on banks that have not shown any improvement but rather used to support the weak ones that are on the recovery path

Way forward

  1. There are enough headaches for banks to handle in the form of the waiver of agriculture loans and the rising share of loans to small businesses, which are risky
  2. While the idea of infusing more money into banks is not bad per se, given that they are grappling with inadequate capital, a lot depends on how and to which banks this money is distributed
  3. This is where the government has to exercise prudence and caution

With inputs from the article: Seeds of a crisis

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