MUMBAI: A day after the government unveiled its mammoth Rs 2.11 lakh crore bank recapitalisation plan, RBI governor Urjit Patel termed it a ‘monumental step forward’ that aids growth and stability. “Economic history has shown us repeatedly that it is only healthy banks that lend to healthy firms and borrowers, creating a virtuous cycle of investment and job creation,” Patel said in a statement on Wednesday.
“I commend the government on its bold steps in this direction, starting with implementation of the Insolvency and Bankruptcy Code that is helping resolve the underlying corporate stress, and culminating in yesterday’s (Tuesday) announcement of the public-sector bank recapitalisation programme,” he said.
According to Arvind Subramanian, chief economic advisor, the interest burden due to recapitalisation bonds will be Rs 8,000-9,000 crore, but it’s unclear if it affects fiscal deficit. Subramanian also batted for the banking sector’s consolidation saying India should ideally have 5-7 large banks, against 22 PSBs whose NPAs nearly trebled to Rs 7.33 lakh crore in June 2017 from Rs 2.75 lakh crore in March 2015.
“For the first time in last decade, we now have a real chance that all the policy pieces of the jigsaw puzzle will be in place for a comprehensive and coherent, rather than piecemeal, strategy to address the banking sector challenges,” Patel said.
Outlining the ‘desirable features’ of the recapitalisation package, he said the proposed bonds will front-load capital injections, while staggering the fiscal implications over time. “As such, the recapitalisation bonds will be liquidity neutral for the government except for the interest expense that will contribute to the annual fiscal deficit numbers,” the governor said.
“Last but not the least, it will allow for a calibrated approach, whereby banks that have better addressed their balance-sheet issue and are in a position to use fresh capital injection for immediate credit creation can be given priority, while others shape up to be in a similar position,” he said.
The issuance of bonds would provide for a good way of bringing market discipline into a public recapitalisation programme compared to the past recapitalisation programmes. Finance-sector policies should support growth, while maintaining financial stability, he said.