Recap plan appropriate, has no fiscal & monetary strain: Reddy

Former Reserve Bank Governor Y V Reddy today welcomed the Government's Rs 2.11 trillion recapitalisation plan for state-run banks as a "perfectly appropriate" decision acceptable from a fiscal and monetary standpoint.
"The solution that is being done is different, perfectly appropriate. In fact it could have been done before also but for whatever reason it is being done now. In terms of fiscal and monetary implications, this is acceptable," he told reporters here.
"Supporting the banking system at this stage with the capital is critical for the economy. There is no question, it has to be provided," he said, after delivering the inaugural R H Patil memorial lecture organised by the Clearing Corporation of India (CCIL) this evening.

On fiscal implications, he elaborated that the Government "will acquire a debt liability and create an equity asset" as part of the plan.
"The only thing that implicitly happening is that if this is able to get a return above the cost of borrowing (for the Government), then there is not even a cost of borrowing. Dividend plus appreciation value, that is not unreasonable," he explained.
Asserting that the Government has to step in every time there is a difficulty, and do so even for the private sector banks, Reddy said it is the Government's job to ensure that economic activity gets going.

Given that taxpayers' money is involved, Reddy asked for some judgement in utilising it.

"It should not be automatic, there should be competition among the banks, and then in my view, there should be a perspective," he said.
Reddy also sought to dismiss fears pertaining to depositors' money being at risk, saying such concerns are meaningless when a bank is created through a statute.
He called the current phase as one with "serious stress" in the banking system, but added that we are not in a "banking crisis".
Reddy said the current announcement is slightly different from similar recapitalisation moves of the past, because now the state-run banks' holdings are diversified whereas as in the previous instances, it was 100 per cent with the state.

Reddy also batted strongly for the interest of the minority private shareholders, saying if it is an equity raising exercise, it should be done through a rights issue.
Stating that we are perpetually in a "disjointed incremantalism" exercise, Reddy said there is a need to define the Government's objective for the 20-odd state-run banks, including things like balance sheet size, market holding etc.
The Government should support only those banks that support the broad objectives which should be laid down, he said.
Asked about the increasing trend of the private sector lenders reporting a jump in NPAs due to RBI's risk based supervision, he said such banks should top-up capital if there is dearth of it.

"If there is inadequate capital, ask them to raise the capital immediately. Otherwise ask them to narrow banking," Reddy said.
If there is material evidence to prove that an auditor colluded with the bank in under-reporting the NPAs, he advocated disqualifying such auditor.
Earlier, delivering the lecture, he called out the system to be extra conscious and study emerging technologies like blockchain, warning that a distributed ledger has the ability to pose existential questions before a body like CCIL.
Speaking at the event, Reserve Bank Deputy Governor B P Kanungo said the central bank is currently focusing on retail payment system which has critical role to play in nudging the system into digital area and away from a cash based economy.

"Customer confidence is of great importance and accordingly our focus has been on facilitating the availability of payment products for all," he said.