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The government wants to spend Rs.70,000 crores to recapitalize the ailing public sector banks. This plan, called ‘Indradhanush’, includes a few other schemes to revamp the banks.

Ideas like the Bank Board Bureau (to prevent government interference in bank appointments), improved systems (of empowerment, governance, accountability), and bank consolidation are welcome.

But the big question remains – why should government spend huge tax payer money to recapitalize banks which deserve to fail. These ailing banks were mismanaged, poorly governed and had little accountability. While these public sector banks have important national/social obligations (like financial inclusion & lending to priority sectors), why can’t we allow a few banks to fail and shock the sector into functioning more efficiently and profitably? In a capitalist system, even a public or social sector business cannot sustain itself without being efficient & earning profits. And, importantly, this is not the first time our public sector banks are facing stress. They have a history of functioning unsustainably.

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It’s not easy to argue against an IIM professor who supports the government’s plan to spend this humongous amount on bank recapitalization (see link below).  But, let’s try anyway.

  1. While banks require capital infusion to maintain capital adequacy a few points above basel norms to remain ‘safe’ and ‘strong’, why did they get into the present situation at all?  Why did they lend recklessly to risky projects?  Were they forced to be imprudent? Are they not responsible to regenerate profits for their shareholders (including GOI and indian citizens)?
  2. Will allowing a few dirty banks to fail really cause a banking crisis, reduce output and impose other fiscal costs? Why can’t we fail some banks, keep others, and publicly demonstrate our intention to clean up the sector?
  3. PSBs have indeed sinned by failing to sustain themselves financially (they need to operate profitably to continue to fulfill their national/social obligations)
  4. The fallout of a few bank failures (like displaced employees) can indeed be severe and it is the government’s job to stand up & manage the situation.
  5. If we are hoping the expected bank consolidation will be an indirect way of letting bad banks disappear and that it will help root out inefficiency, we may be venturing out on unchartered waters. Consolidation of large, bureaucratic and government controlled entities may take years (if not decades) and may fail. Do we really want 15+ PSBs to be mired in the throes of consolidation & mergers for many years? Management will be diverted and day-to-day operations will suffer.

Indradhanush will usher in clear blue skies to the banking sector only if we let a few banks to fail dramatically and publicly.

Myths about recapitalisation…

Indradhanush

Centre injects…

 

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