Banks need to raise private capital to deal with bad loans: RBI

Mumbai, April 29 (IANS) The mounting problem of bad loans of banks cannot be resolved by their simple recapitalisation and options like raising private capital for state-run banks need to be considered to deal with the issue, the RBI said on Friday.

"I wish to propose that we deal with the ailing public sector banks in creative ways instead of just propping them up with state aid," said Reserve Bank of India Deputy Governor Viral Acharya addressing an event by the Federation of Indian Chambers of Commerce and Industry (FICCI) Ladies Organisation.

"Clearly more recapitalisation with government funds is essential. However, as a majority shareholder of public sector banks, the government runs the risk of ending up paying for it all. The expectation of government dole-outs has been set by the past practice of throwing more good money after bad," he said.

Some nationalised banks need to be "re-privatised", Acharya said, to reduce the amount of capital that the government needs to infuse in them and help maintain fiscal discipline.

Citing the Global Financial Stability Report by the International Monetary Fund, he said: "Indian industrial sector is now among the most heavily indebted in the world in terms of the ability of its cash flows to meet its bank loan repayments and it comes out as worse-off compared to other emerging economies in terms of how little bank capital it has set aside to provision for losses on its assets."

Under its Indradhanush programme, the government is putting in Rs 70,000 crore in state-run banks over four years starting from financial year 2015-16. Of this, Rs 50,000 crore is the allocation for the first two years, with the balance equally divided between financial years 2017-18 and 2018-19.

The non-performing assets (NPA) of state-run banks at the end of last September, rose to Rs 6.3 lakh crore, as compared to Rs 5.5 lakh crore at the end of June 2016.

Former RBI Governor Y.V. Reddy has recently said there is no "political economy consensus" on tackling the mounting problem of bad loans of banks, which cannot be resolved by their simple recapitalisation.