RBI welcomes $32 billion public bank recapitalisation

The Reserve Bank of India has welcomed a “decisive” plan by the government to recapitalise India’s ailing public sector banks.

On October 24 the government unveiled funding arrangements worth 2.1 trillion rupees ($32 billion), including the issuance of so-called recapitalisation bonds, and the involvement of private shareholders of the banks.

“The government of India’s decisive package to restore the health of the Indian banking system is in the view of the Reserve Bank of India a monumental step forward in safeguarding the country’s economic future,” RBI governor Urjit Patel says in a statement issued today (October 25).

The plan marks welcome progress in a process that RBI officials have criticised as “glacial”. Deputy governor Viral Acharya sounded the alarm in a speech in September, warning that a “substantial” capital infusion was necessary amid the public banks’ “tepid, now almost moribund, credit growth”.

Public banks account for around 70% of outstanding loans in India, and bear the brunt of the non-performing asset problem. The RBI estimated the average figure for NPAs as a share of total assets across all banks at 17% earlier this year.

Patel says he believes that for the first time in a decade, there is a “real chance” that banking reforms can be made in a “comprehensive and coherent, rather than piecemeal” fashion.

The RBI governor says the government’s plan has the benefit of front-loading capital injections while “staggering the attendant fiscal implications” over some time, due to the issuance of bonds. He also praises the decision to include market funding in the package, and says the infusion is designed such that the better-managed banks can use the funding to increase credit provision right away.

The funding package follows reforms passed in August that made it easier for the RBI to force banks into insolvency proceedings, allowing it to kill off some of the more zombified firms.

If the recapitalisation plan can help revitalise India’s economy, that should alleviate some of the pressure on the RBI’s monetary policy. At its latest policy meeting, in early October, the RBI expressed concern at a loss of momentum in growth, at a time when inflation has shown signs of picking up.

“Strengthening banks will lead to more jobs, more growth and more investment,” finance minister Arun Jaitley said in a tweet.