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Letter to BS: Bank recapitalisation no different from farm loan waiver

The recapitalisation is done by equity participation from where the government gets dividend

Business Standard  |  New Delhi 

I refer to the article in your newspaper on December 24, “Bank recap no different from farm loan waiver” by Tamal Bandyopadhyay. He has concluded that “with general elections round the corner, there will be no end to the flow of public money down the drain — both for farm loan waivers and for PSB recapitalisation”. So he considers bank recap as a populist expenditure which really is nothing but money going down the drain. I am writing to say that nothing can be further from truth than the view that recapitalisation is pouring money down the drain.

The recapitalisation is done by equity participation from where the government gets dividend. Otherwise also the banks get money to give loan to industry with leads to growth. To say that the money is going down the drain, one must make an assumption that the money will be lent to the industry and the repayment is zero. Can anybody make such an assumption? Reserve Bank's Financial Stability Report (FSR) says that in March 2018 the gross NPA ratio was 11.5 per cent and in September 2018 it has come down to 10.8 per cent. FSR also says that it will come down to 10.3 per cent by March 2019. It is well recognized and it has also been reported editorially by Business Standard that the actions through Insolvency and Bankruptcy Code is showing good result. Under the circumstances to assume that giving loans to industry will be nothing but pouring cash down the drain will shock even a layman, not to talk of those who laboriously studied monetary economics.

On January 4, C Rangarajan has written in his article in The Hindu, “Recapitalisation of public sector banks will partly solve the problem of banking sector... it should be completed soon.”

So, the author’s view is quite wrong.

Sukumar Mukhopadhyay, New Delhi

Tamal Bandyopadhyay responds:

Bank recapitalisation without conditions attached to improve performance and making the management responsible is a band-aid approach. Historically, the Indian government has been doing this. Has this in anyway improved the health of the PSU banks? It has just given temporary relief and a lifeline. The amount of money spent in the form of bank recap is far higher than what the government has received as dividends from these banks. In contrast, the money spent by the US to restore the health of its big private banks in the wake of Lehman Brothers collapse and financial crisis has already flowed back to the US treasury. It even made money! In our case, let me repeat, money is just going down the drain. Thanks for reading the column and the feedback.

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First Published: Mon, January 07 2019. 00:43 IST