With reference to Joydeep Ghosh’s report, “Capital infusion is not a solution but is unavoidable: Usha Thorat” (October 27), bank nationalisation was one of the steps taken for financial inclusion. It failed, as banks granted huge loans to influential entities, institutions and sectors through faulty appraisal and poor follow-up. Such loans are nothing but bank finance to rudimentary non-performing assets (NPA). Other reasons are improper identification of big borrowers, faulty formulation of projects, unscientific appraisal methods, influential sanctions, poor or no follow-up and no evaluation resulting in high NPAs. At this juncture banks finance twice, first before an account becomes an NPA and second, after becoming NPA through provisions. The Basel-III requirement of capital adequacy is directly proportional to the quantum of bad loans. They hamper the net worth of a bank.
As several banks are government-owned, they request the government for capital infusion. This is vicious cycle and should not be repeated every five or 10 years. Rather, take the regional rural banks (RRB) route. After capital infusion, the number of RRBs dropped from 196 to 56, so that the surviving ones are viable and vibrant.After all, banks and the government use public money. As rightly said by Thorat, former deputy governor of the Reserve Bank of India: “Capital infusion is not a solution. There is a strong need to reduce the number of banks to seven-nine in a phased manner, accompanied by financial discipline at both levels - lender and borrower.” Avinash Thite, Lucknow
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