Reserve Bank of India deputy governor Viral Acharya has suggested that deposit franchise of state run banks which are in the ‘intensive care unit’ be sold off to private sector banks as the time may be running out for state-run banks to clean-up their balance sheets and recapitalise.
India may need a ‘Sudarshan Chakra’ to clean up the banks effectively as the pace of action at banks are slow, deputy governor Acharya said in a speech titled The Unfinished Agenda: Restoring Public Sector Bank Health in India at the 8th RK Talwar Memorial Lecture.
“I fear time is running out. I worry for the small scale industries that Mr Talwar cared the most about, which are reliant on relationship-based bank credit.
The Indradhanush was a good plan, but to end the Indian story differently, we need soon a much more powerful plan – “Sudarshan Chakra” – aimed at swiftly, within months if not weeks, for restoring public sector bank health, in current ownership structure or otherwise,” Acharya said.
Acharya was referring to the government’s Indradhanush plan announced in 2015, under which public sector banks were promised Rs 70,000 crore in capital over four years starting with Rs 25,000 crore in 2015-16, and similar amount in 2016-17 and further Rs 10,000 crore each in 2017-18 and 2018-19.
Acharya a New York University economics professor was appointed deputy governor of India’s central bank in December 2016 and is known for his out of the box thinking.
He suggested that deposit rich public sector banks reeling under the burden of high non performing assets (NPAs) may be sold to the private sector. “Can the valuable and sizable deposit franchises be sold off to private capital providers so that they can operate as healthy entities rather than be in the intensive care unit under the Reserve Bank’s Prompt Corrective Action (PCA)? Can we start with the relatively smaller banks under PCA as test cases for a decisive overhaul?” Acharya said.
PCA is applied to banks which have seen deterioration in key areas like capital, asset quality and profitability of banks. There have been six banks put under PCA restricting then from announcing dividend, opening branches, hiring and giving loans to companies rated below investment grade.
Acharya said there needs to be more urgency by banks and is worried about the glacial pace at which things are happening. “Why aren’t the bank board approvals of public capital raising leading to immediate equity issuances at a time when liquidity chasing stock markets is plentiful? What are the bank chairmen waiting for, the elusive improvement in market-to-book which will happen only with a better capital structure and could get impaired by further growth shocks to the economy in the meantime?” he said.
Acharya who started his speech with a couple of verses from Henry Wadsworth Longfellow’s The Psalm of Life was poetic in his assessment. “Oft when on my couch I lie in vacant or in pensive mood, the realization that we have put in place a process that not just addresses the current NPA issues, but is also likely to serve as a blueprint for future resolutions, becomes the bliss of my solitude!” he said.