Bank capital

The capital infusion in 13 PSU banks is one more step in the long journey towards dealing with the problem of bank capital, since there is no money for a blockbuster bank bailout


The capital infusion by the government into 13 public sector banks is around a tenth of the total tier I capital that may be required to clean up their books as well as meet Basel III requirements before the March 2019 deadline. In that sense, it seems inadequate. It is better to look at this as one more step in the long journey towards dealing with the problem of bank capital, since there is no money for a blockbuster bank bailout. The strategy now seems to be a hundred small steps rather than a big bang.

The infusion comes a few months after the Reserve Bank of India eased rules so as to allow banks to show their revaluation reserves as tier I capital rather than tier II capital. The new decision is a move away from the earlier tough approach in which only well-managed banks would get government capital. The finance ministry has spread the largesse around irrespective of performance. There is a moral hazard problem here.