Recapitalisation is key

Net interest margin of banks narrowed to an extent that lending activity stopped or decelerated

In the article, “Don’t dither on bank recapitalisation” (May 16), T T Ram Mohan says banks in India, particularly those in the public sector, should not be deprived of much-needed capitalisation in this hour of crisis.

Highlighting extracts from the Economic Survey 2016-17, Ram Mohan says non-performing assets (NPA) of banks are largely due to external economic parameters going awry; the managements of banks are not solely responsible for the turmoil. He has provided precedents of how recapitalisation of banks in the US and European Union brought about a turnaround from subprime crises.

Subsequent to the Reserve Bank of India’s Asset Quality Review (AQR), profit in the books of almost all public sector banks (PSB) has shrunk, with some of them registering loss on account of higher provisioning towards NPAs. The net interest margin of banks has narrowed to an extent that fresh lending activity for big projects has either stopped or decelerated. Wider effects of such hesitation on the part of lending institutions will lead to slowing down of the economy and end in a vicious cycle of NPAs and slowdown. The option of borrowing from the market doesn’t sound worthy or feasible as it is difficult to find a buyer for stocks of PSBs suffering from the aftermath of AQR.

The government might want to link recapitalisation with performance and indirectly compel PSBs to reach a consensus on merger by citing failure to achieve performance parameters. Such deprivation of recapitalisation will have deeper ramifications on the economy in the future.

Sagar Soni   Gandhinagar

---

Letters can be mailed, faxed or e-mailed to: 

The Editor, Business Standard

Nehru House, 4 Bahadur Shah Zafar Marg 

New Delhi 110 002 

Fax: (011) 23720201  •  E-mail: letters@bsmail.in

All letters must have a postal address and telephone number