Home > industry > banking > Arvind Subramanian backs selective capital infusion, bank privatisation

New Delhi: Arvind Subramanian, chief economic adviser (CEA) in the finance ministry, on Wednesday suggested that measures such as privatisation, selective capital infusion into viable banks, and taking stressed loans off the balance sheet of banks will make the record bailout of state-owned banks, announced by finance minister Arun Jaitley, even more effective.

Delivering a lecture at a Delhi University college, Subramanian said that reforms, which will be formulated in the coming days, will also minimize the moral hazard of protecting banks from the consequences of their bad decisions in the past.

Selectively infusing capital in viable banks for their future credit growth, while keeping infusions in unviable ones to the bare minimum, for them to meet their capital adequacy ratios, will help in narrowing the scope of unviable banks. This will also help in getting maximum bang for the buck, the CEA argued, citing former Reserve Bank of India governor Y.V. Reddy.

Subramanian said one view expressed in public discussions on banking reforms is that majority private ownership will help in bringing about an ideal banking world where banks compete domestically and internationally. Although privatisation is not a panacea, public discussion has emphasized “the benefits it will derive from less political interference and politically-directed lending that public ownership has led to in the past", said Subramanian.

Experts said privatisation of state-owned banks can help make them more self-reliant. “Under private ownership, banks tend to stand on their feet and adopt a really profitable business model rather than relying on state support of various kinds. It can also make the banking sector more competitive globally," said Kalpesh Mehta, partner at Deloitte India.

“It is striking how much caution, inertia, and yes, even fear that public sector bank managers experience. That must be addressed," said Subramanian. He said one view is that in future, it may be better to have more private-to-private lending and even private-to-public lending, as the public-to-private lending model has proved toxic. “We want to be careful before we repeat that experiment," he said.

He also pitched for taking out stressed loans from bank balance sheets to improve their valuations and help in raising capital from markets.

The recapitalisation plan that Jaitley announced on Tuesday includes banks raising Rs58,000 crore from the market over two years, in addition to a budget support of Rs18,000 crore and capital infusion of Rs1.35 trillion through bonds.

Subramanian added that the annual interest cost of these bonds to the central government would be about Rs8,000-9,000 crore.

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