Viral Acharya warns against limited bank recapitalisation

He drew a parallel with weak recapitalisation of European banks

Reserve Bank of India (RBI) Deputy Governor Viral Acharya on Friday drew a parallel with the weak recapitalisation of capital-starved European banks that hurt those economies to say India should avoid that route.

Speaking at an event in New Delhi on Friday, Acharya said a fiscally-strapped government did not help banks by opting for their limited recapitalisation.

Quoting from a detailed study of the European experience, he said banks must be fully recapitalisated for them to begin lending to productive assets. “Else they choose to indulge in zombie banking, chasing weak assets.” He pointed out that in Europe the forbearance by the central bank allowed weaker banks to offer loans to entities at rates that were even better than those offered by better-run banks for their clients. The deputy governor said he supported the merger of banks, if done carefully. “The ability to raise funds by the new entity should not suffer as that would cut the very basis of the merger.”

Clarifying that these views were his own and not these of the RBI, Acharya said, “I am for privatisation of some of the public sector banks in India if the government cannot spend capital adequately on them.” He explained that while there was no a priori reason for private or public sector banks to get into trouble, the latter face limited market discipline and were therefore more at risk of doing “zombie” banking. Their loans were not meant for returning but for evergreening, he said.

According to him, the money so lost on those banks had an opportunity cost and would have led to better investment in the economy if put in the hands of better-run banks. The costs were in terms of lost employment and investment opportunities.

Acharya’s comments come in the context of the central government trying to push ahead with banking reforms.