'Recapitalisation not birthright of PSU banks'

To improve credit outflow from public sector banks (PSBs), which account for more than 70 per cent of the banking activity in India, there is certainly a need to recapitalise PSBs, says Charan Singh, RBI Chair Professor of Economics, Indian Institute of Management, Bangalore. In his view, such recapitalisation should be undertaken on a conditional basis.

The RBI at its bi-monthly policy statement said a targeted infusion of bank capital into scheduled public sector commercial banks, especially those that implement concerted strategies to clean up stressed assets, is also warranted so that adequate credit flows to the productive sectors as investment picks up.

Charan says, “The stressed assets, in general, are because of the slowdown of the economy, and in particular, in some PSBs, allegedly, because of targeted lending to certain segments of the economy. The PSBs need to restructure their stressed assets by first undertaking stringent measures at their own end.  They need to deal with NPAs either by ensuring higher recovery as private sector banks successfully achieve or disposing of them from the balance sheet.”

In case of PSBs, there is a clear case of moral hazard as banks know that government will bail them when the time comes, he says. “In the present context of fiscal consolidation undertaken by the government, automatic recapitalisation should not be expected by commercial banks.

“Recapitalisation is not a birthright of PSBs. The argument that PSBs suffer from stressed assets because of priority sector lending can also be contested by seeking specific data from PSBs on such stressed assets. PSBs should then be accountable and held responsible, at least, for stressed assets in non-priority sector lending. Private banks and foreign banks have navigated through difficult economic conditions without such high levels of stressed assets.”

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