The advisor also said that the government has various options in mind to sort out the banking mess, including recapitalization and diluting the government’s stake
If all goes to plan, the public sector banks are set to witness a recapitalisation and consolidation drive in coming months with the number of public sector banks reducing by half.
Speaking at India Economic Summit, organised by World Economic Forum and Confederation of Indian Industry, Sanjeev Sanyal, principal economic advisor, said that recapitalisation could be done in a few months.
“The first part of the clean-up, which is recognising the bad assets and taking some of them through the bankruptcy process, that part of the process is well underway… Now, the second part of it… which is the recapitalisation, will be done in next few months,” said Sanyal.
Bad loans in India grew to a massive Rs 11.5 lakh crore or 14 percent of total advances. As of March 2017, the percentage of non-performing asset (NPA) stood at 9.5 percent. It is expected to rise to approximately 10.5 percent by March 2018 as per Crisil, a rating agency.
Sanyal said that government was considering “reducing” the number of public sector banks by half.
“There are something like 21-22 public sector banks… There is a case for reducing that number for commercial reasons,” he said. He, however, said that merger is not the only solution as consolidation could lead to “too big to fail” banks.
“The number will be reduced but somewhere between 10 and 15,” he said.
He said that creating few banks could lead to “real problem in terms of concentration of risk”.
“Adding two inefficient banks doesn’t lead to an efficient bank… Cleaning up the bank is the first priority,” Sanyal said adding, “We need to consolidate some of these bank. But, we are not going to reduce this to four or five national champions. That is not at all the case…”
The advisor also said that the government has various options in mind to sort out the banking mess, including recapitalisation and diluting the government’s stake.
“There are many options on the table, which range from creating recapitalization bonds, diluting down the government’s stake up to 52 percent, some assistance could come from budget itself,” he said.
He said that options will be explored in combination, but the recapitalisation issue was “well understood and would be done soon”.
The banking sector, with financial assets worth Rs 77.70 lakh crore, is capital-starved and has been pitching for government’s intervention for infusing capital.Sanyal said that government was considering selling stake in the banks only “for the time being” and that the government has “enough funds” to save the banks.