RBI governor showers praises on bank recapitalisation plan

In an unusual communique, Reserve Bank of India (RBI) governor Urjit Patel, who in the past had stressed on an urgent need for capital infusion in banks while sharing the same dais with finance minister Arun Jaitley, termed the latest recapitalisation plan as a “monumental step forward in safeguarding the country’s economic future.”

The finance ministry on Tuesday said it will infuse Rs 2.11 lakh crore in government banks over two years through recapitalisation bonds and market borrowings. The recapitalisation bonds worth Rs 1.35 lakh crore won’t hit the market while some of the provisions for other means of capitalization has already been provisioned in the Budget.

In a statement titled, ‘RBI welcomes bank recapitalization plan,’ Patel said “a well-capitalized banking, and in general, financial intermediation, system is a pre-requisite for stable economic growth.”

Only healthy banks can lend to healthy firms and borrowers, “creating a virtuous cycle of investment and job creation.”

“For the first time in 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,” the governor said in his statement on the central bank website, adding the step has been taken in a time of “sound macroeconomic conditions for the economy on other fronts.”

The recapitalisation plan has several “desirable” features, such as front-loading capital injections while distributing the fiscal implications over a period of time.

Therefore, the recapitalisation would be revenue neutral for the government, except for the interest expense that will contribute to the annual fiscal deficit numbers.

Private shareholders of such banks would be part of the process as a part of the fundraising will have to be met by the markets.

“Last but not the least, it will allow for a calibrated approach whereby banks that have better addressed their balance-sheet issues and are in a position to use fresh capital injection for immediate credit creation can be given priority while others shape up to be in a similar position,” the governor said, adding this will introduce market discipline into the present recapitalisation program compared to the past recapitalisation programs.

While commending the government on its ‘bold steps’, on behalf of the central bank, the governor said, “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.”