Capital infusion isn't a solution, but is unavoidable: Usha Thorat

Usha Thorat, former deputy governor, RBI.
With the government announcing a mega bank recapitalisation package of Rs 2.11 lakh crore on Tuesday, many public sector banks (PSBs) starved of cash would breathe more easily. Usha Thorat, former deputy governor, Reserve Bank of India, says this capital infusion will help banks withstand the write-offs needed for resolution of non-performing assets (NPAs). Thorat tells Joydeep Ghosh the government should quickly follow up with professional management, autonomy and more accountability in these lenders. Edited excerpts:

What is your initial reaction to the recapitalisation package for PSBs? 

This is a big step, as it was needed for public sector banks to start functioning again properly. For quite some time, nothing was forthcoming. On the other hand, the introduction of asset quality review, tightening of norms, etc, although very much required, was only choking the credit delivery mechanism for public sector banks.

These banks could not have been allowed to come below the minimum capital requirement under international norms. So, this was a logical consequence. Also, instead of earmarking Rs 10,000 crore or Rs 20,000 crore in every Union Budget, the significantly higher amount of Rs 2.11 lakh crore should give a big push to PSBs. 

Were there other options that the government could have explored? 

I don’t think there were other options, besides privatisation. Even for that, some capital infusion would have been necessary to improve the banks’ books. As PSBs cater to 80 to 85 per cent of the system, this situation could not be allowed to continue. 

However, there should be a realisation that this capital infusion, although absolutely required, is not a panacea. The government should ensure the credit allocation mechanism is not diluted and there is prudential credit decision and follow-up at every stage. Getting professional management is also very critical. Banks should get more autonomy and made more accountable. 

Capital infusion is just the beginning, and all other steps like greater professionalism, better governance and more autonomy are required. 

Corporate lending has been lagging. Will there be a pick-up after this infusion? 

Corporate lending might not pick up immediately. It depends on the stress in corporate balance sheets and demand for credit. However, the focus of the government is on increasing the lending for small and medium enterprises. Loans for Rs 10 lakh, Rs 20 lakh or Rs 1 crore will definitely get a push from this move. Credit growth in private sector banks and non-banking financial companies is already quite good. Public sector banks can surely use this opportunity to restart lending to this sector. 

Does this mean bank mergers will take a back seat? 

I didn’t hear any talk about bank mergers during the announcement of the package. Even linking of the package to performance isn’t very clear. Mergers come with their problems. During the transition face of a merger, business almost comes to a halt. So, perhaps there is a view that with this capital infusion, banks should get on with their businesses. There was some reference to PCA (prompt corrective action) banks getting priority but this is not clear. 

Is it also an admission that the National Company Law Tribunal route to resolving the NPAs of banks will be a long-drawn process in which banks may have to take large haircuts? 

I don't think it is this or that. Capital infusion was essential and can make banks withstand the required haircuts. The important thing in our system is whether it penalises owners and promoters when there are haircuts or is it always banks that are holding the baby.

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