Healthier PSBs must ease govt’s burden by raising private capital: Viral Acharya

To deal with ailing public sector banks, Reserve Bank of India Deputy Governor Viral Acharya on Friday proposed five options, including showing some tough love (entailing no further growth in deposit base and lending), mergers and asset sales.

This, in turn, would create an opportune time for the government to divest some of its ownership of the restructured banks, including possibly re-privatising them.

Cautioning the government that capital must not be allocated so poorly as to recreate “Heads I Win, Tails the Taxpayer Loses” incentives, and sow the seeds of another lending excess, Acharya said there are creative ways — via asset sales, mergers, tough prompt corrective action, and divestments — of dealing with ailing PSBs instead of just propping them up with State aid.

“All this would reduce the overall amount the government needs to inject as bank capital and help preserve its hard-earned fiscal discipline, which along with stable inflation outlook and the diverse nature of our growth engine, appears to have made India the darling of foreign investors at the present moment. We should grapple this macroeconomic stability to our shores with hoops of steel,” he said.

The Deputy Governor, who was addressing the ‘FICCI FLO Mumbai Chapter’, observed that the healthier PSBs could have raised private capital by issuing deep discount rights in 2013, and some can still do so now.

“They must be required to do this to share the government’s burden of recapitalising banks. It might be a good way to restore some discipline and get the bank shareholders, boards and management to more seriously care about the quality of lending decisions,” he said.

Some banks will have assets or loan portfolios that are in good enough shape to be sold in the market. Modern banks no longer just make bank loans but also hold non-core assets such as insurance subsidiaries, market-making divisions, and foreign branches, among others.

In this regard, Acharya suggested that “such non-core assets can be readily sold. Other assets could be collected across banks and organised into different risk profiles, so as to build transparency and trust with healthier banks and other intermediaries with an interest in purchasing them. Such asset sales can generate some of the needed recapitalisation.”

Emphasising that the system will be better off if PSBs are consolidated into fewer but healthier banks, the Deputy Governor, said: “After all, we do have cooperative banks and micro-finance institutions to provide community-level banking.

“So some banks can be merged, as a quid pro quo for timely government capital injection into the combined entity. It would offer the opportunity to rejig management responsibility away from those who have under-performed or dragged their feet the most.”

Acharya felt that synergies in lending activity and branch locations could be identified to economise on intermediation costs, allowing sales of real estate where branches are redundant.

“Voluntary retirement schemes (VRS) can be offered to manage headcount and usher in a younger, digitally-savvy talent pool into these banks. Historically, bank stress of the order we face has almost always involved significant bank restructuring,” he said.

Under-capitalised banks, the Deputy Governor said, could be shown some tough love and be subjected to corrective action, such as the revised Prompt Corrective Action (PCA) guidelines recently released by the RBI.

“Such action should entail no further growth in deposit base and lending for the worst-capitalised banks. This will ensure a gradual “run-off” of such banks, and encourage deposit migration away from the weakest public sector banks to healthier public sector banks and private sector banks.

“It is not rocket science to figure out where the growth potential in our banking sector lies and deposit growth should be allowed to reflect that,” he explained.

Acharya underscored that the presence of the large safety net of deposit insurance and State ownership, which ensure that there are likely to be no bank runs, end up eroding any disciplining force that gets the bank’s health restored to a state where the economy can bank upon its banks to perform the economic functions of fuelling and lubricating growth.

Acharya said: “Deposit insurance and State ownership help the sick patient survive but on their own do not guarantee good health; they may prevent financial instability but do not restore credit growth to levels that a vibrant economy needs.”

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