RBI’s Viral Acharya calls for adequate recapitalization of PSU banks
Mumbai: Reserve Bank of India (RBI) deputy governor Viral Acharya batted for “decisive and adequate recapitalization” of public sector banks to improve the health of these lenders, even as he expressed concern at the “glacial” pace of restoring public lenders’ health.
“Given the correctly recognized scale of NPAs (non-performing assets) in the books of public sector banks and the lower internal capital augmentation, given their tepid, now almost moribund, credit growth, substantial additional capital infusion is almost surely required,” he said while delivering a memorial lecture at the Indian Institute of Banking and Finance on Thursday.
According to Acharya, even if banks raise capital from other avenues such as sale of non-core assets, shares, or divestment by the government, they will still be in need of fund infusion.
He said that the capital requirement of state-owned banks is more than that outlined under the so-called Indradhanush plan. Announced in 2015, Indradhanush budgeted Rs20,000 crore in total towards recapitalization over this fiscal and the next.
According to a Moody’s Investors Service estimate, 11 big state-owned banks alone will require additional capital to the tune of Rs70,000 crore to Rs95,000 crore.
In his speech, Acharya drew on the example of Japan and Europe, regions which went through banking sector stress but failed to adequately recapitalize lenders.
Since 2014, the central bank has taken various steps for stressed asset resolution-from setting up a database of large- ticket loan exposures, nudging banks to recognize bad assets through a review, to its recent directive asking banks to initiate proceedings against 12 large borrowers under the Insolvency and Bankruptcy Code (IBC). It has followed up with a second list of defaulters, where banks have to come-up with a resolution latest by 13 December.
Acharya said that going forward, RBI hopes that banks utilize the IBC extensively and file for insolvency proceedings on their own without awaiting regulatory directions.
“We have created a due process for stressed assets to resolve but there is no concrete plan in place for public sector bank balance sheets. How will they withstand the losses during resolution and yet have enough capital buffers to intermediate well the huge proportion of economy’s savings that they receive as deposits? Can we end the Indian story differently from that of Japan and Europe?” he asked.
Public sector banks have the lion’s share of the stressed loans in the banking system, which have ballooned to around Rs10 trillion.
Acharya said this was the primary cause of the recent slowdown in loan growth.
“The resulting weak loan supply, and the low efficiency of financial intermediation have created significant headwinds for economic activity,” he said.
The banking system’s loan growth has fallen substantially from over 20% in March 2011 to around 5% currently. The fall is substantial in the case of public sector banks compared to their private sector peers.
The government has drawn up an alternative mechanism for bank recapitalization involving stake divestment through exchange-traded funds and initiation of bank mergers, which could provide an opportunity to strengthen balance sheets and enable the bigger merged lenders to raise capital at better market valuations.
“All of this is good in principle. There are several options on the table and they would have to work together to address various constraints. What worries me however is the glacial pace at which all this is happening,” Acharya remarked.
He raised several questions such as whether a feasible recapitalization plan can be announced publicly to restore investors’ confidence. He also came down heavily on bank management, asking why they were not tapping the market for capital when plentiful liquidity was chasing stock markets.
“What are the bank chairmen waiting for? The elusive improvement in market-to-book which will happen only with a better capital structure could get impaired by further growth shocks to the economy in the meantime,” he warned.
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