Let PSBs stabilise post fund infusion before mergers: Rai
, ET Bureau|
Oct 28, 2017, 12.16 AM IST
NEW DELHI: Banks Board Bureau chief Vinod Rai welcomed the government's Rs 2.11 lakh crore recapitalisation plan but noted that it would be prudent to let public sector banks (PSBs) stabilise before consolidation is pursued.
"It is a very timely and progressive move to recap banks. We could not have waited endlessly for them (banks) to resolve stressed assets before capitalising them," he told ET, adding that this along with the government's infrastructure spending push would help lift the economy.
There are signs of a revival in growth, which had slumped to a three-year low in the June quarter.
"Already, green shoots are visible in the economy, like manufacturing activity is picking up. We could not have waited endlessly and the credit growth process would have been severely impacted," he said, without the recapitalisation.
Rai said demonetisation had led to banks being flush with liquidity and it was not prudent to simply park these funds with the regulator.
"It was a total waste of money, because it was not earning anything and not being ploughed back into the banking system," he said. "They (banks) were crying for capital, while trying desperately to resolve stressed assets."
The government recognised that it was a systemic problem and has taken steps to resolve it by, among other things, strengthening existing recovery laws and the Bankruptcy Act, Rai said.
"The resolution process has been delayed because process of recognition was long, but now we have a legal system which is well suited for resolution. You can't wait forever and say resolution should take place and only then I would recapitalise," he said.
Globally, governments have used innovative ways to finance lenders and around 19 countries have resorted to recapitalisation bonds. Turkey, Portugal and Ecuador are among the ones that have done so recently, he said. Rai said the right time for consolidation would be when the process of recognition of bad loans and capital support is over.
"Let them stabilise first and after that banks need to sit together, see the elements of stress or otherwise and then go for consolidation," he said, adding that the next fiscal (FY19) will be better for mergers. The government and the Reserve Bank of India want fewer, stronger state-run banks that have the ability to handle the requirements of an expanding economy.
"The key criteria are that there should be value gain for merging entity, HR cultures are taken care of and shareholder value is not lost," he said. The Banks Board Bureau was set up by the government last year to improve governance at banks, help select their leadership and devise strategies for expansion and raising funds.
"It is a very timely and progressive move to recap banks. We could not have waited endlessly for them (banks) to resolve stressed assets before capitalising them," he told ET, adding that this along with the government's infrastructure spending push would help lift the economy.
There are signs of a revival in growth, which had slumped to a three-year low in the June quarter.
"Already, green shoots are visible in the economy, like manufacturing activity is picking up. We could not have waited endlessly and the credit growth process would have been severely impacted," he said, without the recapitalisation.
Rai said demonetisation had led to banks being flush with liquidity and it was not prudent to simply park these funds with the regulator.
"It was a total waste of money, because it was not earning anything and not being ploughed back into the banking system," he said. "They (banks) were crying for capital, while trying desperately to resolve stressed assets."
The government recognised that it was a systemic problem and has taken steps to resolve it by, among other things, strengthening existing recovery laws and the Bankruptcy Act, Rai said.
"The resolution process has been delayed because process of recognition was long, but now we have a legal system which is well suited for resolution. You can't wait forever and say resolution should take place and only then I would recapitalise," he said.
Globally, governments have used innovative ways to finance lenders and around 19 countries have resorted to recapitalisation bonds. Turkey, Portugal and Ecuador are among the ones that have done so recently, he said. Rai said the right time for consolidation would be when the process of recognition of bad loans and capital support is over.
"Let them stabilise first and after that banks need to sit together, see the elements of stress or otherwise and then go for consolidation," he said, adding that the next fiscal (FY19) will be better for mergers. The government and the Reserve Bank of India want fewer, stronger state-run banks that have the ability to handle the requirements of an expanding economy.
"The key criteria are that there should be value gain for merging entity, HR cultures are taken care of and shareholder value is not lost," he said. The Banks Board Bureau was set up by the government last year to improve governance at banks, help select their leadership and devise strategies for expansion and raising funds.
