With the government under pressure to meet its fiscal deficit target over the medium term, the economic survey, released by the finance ministry, on Friday said the Reserve Bank of India (RBI) should deploy some of its capital in the public sector banks (PSBs).
The survey highlighted the ratio of shareholder equity to assets (total equity as a percentage of balance sheet) for RBI is very high among various central banks, at 32 per cent, only after Norway and well above that of the U.S. Federal Reserve and the Bank of England whose ratios are less than 2 per cent.
“If the RBI were to move even to the median of the sample (16 per cent), this would free up a substantial amount of capital to be deployed for recapitalizing the PSBs,” the survey said.
Public sector banks are in need of capital as bad loans have surged in the last few years and also to meet Basel-III norms. The finance ministry estimates public sector banks will need Rs.1.8 lakh crore capital infusion for four years ending March 2018-19 while the government plans to infuse only Rs.70,000 crore during the period.
The survey said the option that government sells its non-financial assets to infuse capital in public sector bank is a well understood proposition but what is less appreciated is that RBI could do the same.
“That is to say it could redeploy its capital as well,” the survey said.
Banking industry experts said the idea may not go well with the RBI which insists that its regulation is ownership neutral.
“Why give capital only to public sector banks? Why not to private sector banks also?” asked an analyst on the condition of anonymity.
The survey said any such move would need to be initiated jointly and cooperatively between the government and the RBI.
“It will also be critical to ensure that any redeployment of capital would preserve the RBI’s independence, integrity and financial soundness—and be seen to do so,” it said.
The survey also pointed out that stress, which is emanating from both banks and corporate sector, is a major impediment to private investment and a full-fledged economic recovery.
“This situation is not sustainable; a decisive solution is needed. But finding one is difficult,” the survey said.
