New Delhi : A day after government announced a massive Rs 2.11 lakh crore capital support initiative, Chief Economic Adviser Arvind Subramanian Wednesday made a case for consolidation in the banking space saying the country ideally should have 5-7 large lenders. In an ideal banking world of tomorrow, India needs to have both large public sector and private sector banks, competing domestically and being competitive internationally, he said in a lecture at SGTB Khalsa College here. Citing example of China, he said, there are four big banks which are now amongst biggest in the world.
“The big question also going forward is should there be more majority private sector ownership in the banking system? What is a good banking structure for India 5-10 years from now and…basically India needs…we need about 5,6,7 reasonably big banks both public and private sector and to be able to compete domestically and to be competitive intentionally,” he said.
Quoting former RBI Governor Y V Reddy, Subramanian said the aim must be to shrink or narrow the scope of the unviable banks. Talking about the recapitalisation, he said it must be selective and incentive based, directing it to those banks where the bank for buck in terms of new credit creation will be maximum.
“Since all banks must maintain a minimum capital adequacy, one possibility would be to recapitalise the unviable banks only to the extent necessary to finance their current balance sheet size while explicitly not providing for their growth,” he said.
Finance Minister Arun Jaitley unveiled an unprecedented Rs 2.11 lakh crore two-year road map to bolster NPA-hit public sector banks, which includes re-capitalisation bonds, budgetary support, and equity dilution on Tuesday. Such bonds were first introduced by the government in the 1990s to recapitalise PSU banks.
Responding to a query on the Goods and Services Tax (GST), Subramanian said there is a strong preference for having low rates.
Interest cost of recapitalisation bonds at Rs 9K cr
Chief Economic Adviser Arvind Subramanian Wednesday said interest burden of recapitalisation bonds on the government would be around Rs 9,000 crore and the move may not have an inflationary impact. This cost can be offset by growth in economic activity, credit supply and private investment, he said in a lecture at SGTBKhalsaCollege here. “First, the true fiscal cost of issuing the Rs 1.35 lakh crore recapitalisation bonds is the interest payment of about Rs 8,000-9,000 crore. But cost can be offset by the confidence impact of addressing the critical economic bottleneck, thereby increasing credit supply, private investment and growth,” he said. He illustrated the point, saying that under standard international and IMF accounting, recap bonds do not increase deficit and they are “below-the-line” financing. However, in India’s case, these bonds are expected to add to deficit.
