Bank recapitalisation and banking reforms finally go hand in hand


The Reserve Bank of India (RBI) and the finance ministry have been jointly working on the Rs2.1 trillion recapitalisation package for public sector banks. This piece of information released at the RBI governor’s press conference after the monetary policy committee meeting on Wednesday is definitely more important than RBI’s monetary policy review.

Historically, the government (read: the finance ministry), the majority owner of the PSU banks, decides on which bank gets how much capital. In the past, each time the government announced bank recapitalisation, there was extensive paper work and data gathering and extracting promises on performance from the banks but ultimately it all depended on the whims and fancies of the officials of the finance ministry and lobbying of the respective banks. There was no art or science behind the distribution of money.

This is being changed, and changed for the better. This time around, it seems bank recapitalisation and banking reforms will go hand in hand. This means, there will be definite preconditions and only when the banks accept those conditions, they will get their lifeline in the shape of recapitalisation bonds.

Those banks which have relatively strong balance sheets and are doing reasonably well will get the capital in the first round. The laggards will have to make many commitments, including sale of non-core assets and change in focus areas to be eligible for recapitalisation funds.

This is being done to prevent a recurrence of pile in bad assets and yet another round of government bailout, using taxpayers’ money.

Simply put, banks cannot take recapitalisation funds for granted; they will have to earn it. Far too long the Indian government has been too democratic in doling out money to its ailing banks. It’s time to show the door to those banks which are fast becoming irrelevant. The news of the day is not an actionless RBI’s bimonthly monetary policy review, but the Indian central bank’s determination to play an active role in determining which bank will get how much money, and not leaving it to the government’s benevolence.

An extended pause

The bond market heaved a sigh of relief on Wednesday with the RBI’s bimonthly monetary policy review turning out to be a non-event. There was a minor 3-4 basis points rally in the market after the Indian central bank kept its stance of the policy unchanged—neutral.

One basis point is one-hundredth of a percentage point.

No one was expecting RBI to tinker with its policy rate and hence there was no surprise that it has not changed the rate but the relief came from the tone of the policy. It is definitely not more hawkish than the October policy when RBI pressed the pause button. The Indian central bank has made it amply clear that it has no bias and only the flow of data in future will determine the trajectory of the policy. This means, nothing will change too soon (read: the February review) and we are in for an extended pause.

RBI has raised the projection of inflation in the second half of current fiscal year by 10 basis points—from a range between 4.2-4.6% to 4.3-4.7%.

Here, too, there is no surprise—the market has all along been a bit over-ambitious on the inflation front while the central bank remains pragmatic. The growth projection also remains unchanged at 6.7%, keeping in mind quite a few factors including recapitalization of public sector banks and the bulk of money being raised from the primary market. After a sudden slump in the economic growth in the June quarter to a three-year low 5.7%, growth bounced back to 6.3% in the July-September quarter. The Reserve Bank expects 7% growth in the December quarter and 7.8% in March.