Recap plan a chance to put all policy pieces of jigsaw puzzle in place: Urjit Patel

The Reserve Bank of India (RBI) Governor Urjit Patel smiles while attending a seminar during the Vibrant Gujarat investor summit in Gandhinagar, India, January 11, 2017. REUTERS/Amit Dave - RTX2YGT5

A day after the government announced the massive Rs 2.11 lakh crore capital infusion plan, the Reserve Bank of India has called it a “real chance” to put in place a comprehensive and coherent system, rather than a piece-meal, strategy to address the banking sector challenges.

On Tuesday, the Finance Ministry announced Rs 2.11 lakh crore capitalisation plan for public sector banks including Rs 1.35 lakh crore worth of recapitalisation bonds and Rs 76,000 crore through budgeting and market fund-raising.

“For the first time in the 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 piece-meal, strategy to address the banking sector challenges… A well-capitalised banking, and in general, financial intermediation, system is a pre-requisite for stable economic growth,” said RBI Governor Urjit Patel, in a statement issued on Wednesday.

The Government of India’s decisive package to restore the health of the Indian banking system is, in the view of the Reserve Bank of India (RBI), a monumental step forward in safeguarding the country’s economic future, he said.

According to him, the 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.

Currently, the banking sector is battling non-performing assets or NPAs worth Rs 8.5 lakh crore even as they are starved of capital to meet for provisions towards the losses of such loans and maintaining a capital buffer while they struggle with weak credit growth at a mere 6 percent.

First, the deployment of recapitalisation bonds will involve front-loading the capital. It will have a staggering impact on the fiscal front over a period of time. It will not be an outlay of capital for the government except for the interest expense contributing to the fiscal deficit numbers, he said, enumerating the benefits of the plan.

Second, it will involve participation of private shareholders of public sector banks.

Lastly, banks better at managing their balance-sheet issues and those in a position to use fresh capital injection can be given priority while others shape up.

“This provides for a good way of bringing some market discipline into a public recapitalisation programme compared to the past recapitalisation programmes. The RBI looks forward to working with the Government to ensuring these plans reach their natural completion to the benefit of the broader Indian economy,” the governor’s statement added.

Read the text of the Governor's statement here