Concerns with Banks Recapitalisation

What is the issue?

• The Centre recently announced the details of recapitalisation plan for PSBs. Click here to know more.
• While the move has been largely viewed with optimism, there are serious concerns that demand a reassessment.

What are the benefits?

• Capital infusion reinforces the Centre’s commitment to support weak public sector banks.
• This will certainly help them meet the regulatory capital requirement.
• ON the other hand, it will provide growth capital to the slightly better performing banks.
• Also, the deadline for resolving the first set of large accounts under IBC is fast approaching (by March, 2018).
• Given this, capital infusion will give more space for the banks to clean up their balance sheets.

What are the concerns?

• 46% more capital has been given to the banks under the RBI’s prompt corrective action.
• This is owing to their weak capital and higher NPA levels.
• This is against the general perception that bigger and better performing banks would be rewarded with more capital.
• The plan evidently offers a larger share of capital for weaker banks.
• This, in a way, denies the growth capital to more deserving banks.
• Notably, weak bank’s capital ratios have increased beyond the requirement to meet the regulatory threshold.
• The Centre's approach is only indicative of higher bad loan provisioning in the coming quarters.
• Besides, the recap plan makes some relaxations to existing systems.
• These are in relation with:

1. closer monitoring of big-ticket loans
2. identifying niche areas where a bank has strengths
3. restricting corporate exposure to 25%
4. a new performance management system

What should be done?

• The capital offered should be able to meet the government’s service priorities.
• This, in particular, applies to smoother credit flows to small businesses.
• The constitution of the Banks Board Bureau was a welcome move in the governance of PSBs.
• But impact thus far has been very minimal.
• PJ Nayak committee’s recommendations including giving more autonomy to bank boards need to be implemented in true spirit.
• Thus, a sustained solution lies in taking forward the structural reforms.
• This is even more crucial for the current recapitalisation exercise to pay favourable results.

Source: Business Line, The Hindu