Home World Economy ‘Governance reform’ must to receive government capital, says RBI Governor Urjit Patel

‘Governance reform’ must to receive government capital, says RBI Governor Urjit Patel

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MUMBAI: Reserve Bank of India Governor Urjit Patel sent a firm message that banks recapitalisation would be funnelled to only those state-run lenders that reform their working and lending practices to ensure that the mistakes of the past are not repeated.

“It will be a reform and recap package and not just recap package so as to ensure this money is used to strengthen public sector bank balance sheets and that we don’t sow the seeds of the next boom and bust cycle of lending,” Governor Patel told reporters at the post monetary policy review press conference. “Governance reforms for all public sector bank will also feature as part of the overall plan.’’

Governor Patel’s message to the management of state-run banks comes at a time when they are struggling to recover dues from defaulters as their stressed loans surge to a record high of 14 per cent of total loans. The government after a lot of deliberations has agreed to invest Rs. 2.1 lakh crores into the banks, but with strings attached.

Patel said that recap bonds will be front loaded for banks that have managed the balance sheet strength more prudently and can use injected capital to lend besides providing for legacy asset losses.

The other banks that will receive government contribution will be based on their resolve and progress towards reform in a significant and time bound manner such as becoming `slim and trim’ through adoption on simpler, better focused business strategies and also possibly non-core asset sales.

Patel said that RBI and government are discussing two factors. First is the extent of funding to each banks and the amount of recapitalisation bonds to be based on the bank’s balance sheet as government equity contribution.

“Recapitalisation bonds will be front loaded for banks that have managed their balance sheet strength more prudently and can use injected capital to lend beside providing for legacy asset losses,’’ said Patel. “The other banks will receive government contribution based on their resolve and progress towards reform in a significant and time bound manner such as becoming slim and trim.’’

In the last 10 years, government has invested Rs 1.50 lakh crore in state-run banks but it is only now that the government is proposing certain preconditions to receiving capital.

For the fiscal year 2016-17, nine banks reported combined loss of Rs 18,066 crore due to provision they had to make for the sharp rise in bad loans. This year too, a number of banks are expected to report losses as they will need to make higher provisions on loans to companies referred to bankruptcy court.

The RBI has triggered a prompt corrective action on seven banks and bankers feared that many of these PSU banks may fail to adhere the capital norms without capital infusion.

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