Beyond Recapitalisation

Context:  The recent Union Government sought approval for additional expenditure recapitalization of public sector banks would not address the central problems of the PSBs.

Issues with the banks:

• Rising Gross Non-Performing Assets: According to the Reserve Bank of India (RBI), NPAs are expected to increase to over 15% by the end of the current fiscal year. 

• Downsides of Interest Waivers: RBI had warned that any waiver of interest on loans would affect the viability of the financial sector.

• Lost Revenues: According to the banking regulator, banks could lose interest worth about Rs2 trillion if a waiver is granted for six months.

• Neutralize the relief sought: Since the waiver will affect banks’ income, the relief would come essentially at the cost of shareholders, including the government, which will need to put more capital in PSBs.

• Impact on recovery: A weaker banking system would not be able to extend credit to the productive sectors of the economy, and this would affect recovery.

• Unfair to those who are servicing their loans in time.

Relevant Committee: The Union government has set up an expert committee, led by former Comptroller and Auditor General Rajiv Mehrishi, to study the potential impact of waiving interest and interest on interest for the COVID-related moratorium period on the economy and financial stability.

Conclusion: 

• At a broader level, it is important to recognize that the banking system or the regulator cannot protect all borrowers, and this should not even be attempted. 
• Thus, both the government and the court should allow the banking regulator to take decisions in this context as it is also responsible for maintaining financial stability.