The government is weighing the option of getting the Reserve Bank of India (RBI) to part-finance the capital infusion plan for public sector banks and has initiated discussions with the central bank to deploy a portion of its foreign exchange or other reserves for this purpose, sources have told The Indian Express.
The discussions, an official said, are at a “nascent stage” and depending on the response of the RBI, the Finance Ministry will work on creating a mechanism for capital infusion that is in consonance with fiscal responsibility regulations.
“We are looking at various options for funding recapitalisation bonds. One of the options is the RBI providing partial funding,” the official said. The government last month announced plans to inject Rs 2.11 lakh crore of equity in PSU banks — Rs 1.35 lakh crore through recapitalisation bonds, Rs 18,000 crore from budgetary resources and Rs 58,000 crore to be raised by banks from the market.
The official said the government will stick to the timeline of capital infusion announced earlier and a significant portion of the equity can be injected in a couple of months.
With foreign exchange reserves crossing $400 billion, there is a view within the government that a portion can be used for capitalising banks without adversely affecting the country’s import cover and macro-economic stability. As of September 22, the RBI’s foreign exchange reserves were $402. 24 billion. The forex reserves comprised foreign currency assets of $377.751 billion, gold of $20.69 billion, special drawing rights of $1.51 billion and reserve tranche position of $2.29 billion with the International Monetary Fund, RBI data shows.
Emails sent Wednesday to the Finance Ministry and RBI for comments did not elicit any response.
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In 2007, the RBI had approved a proposal to invest up to $5 billion out of its forex reserves to fund a wholly-owned UK-based subsidiary of the India Infrastructure Finance Company Ltd (IIFCL). The IIFCL subsidiary used these funds to lend to Indian companies executing infrastructure projects in India, or to co-finance their external commercial borrowings for such projects for expenditure outside India for infrastructure projects.
Earlier this year, the Economic Survey 2016-17 had suggested that the government use a part of the extra capital available with the RBI to capitalise banks. “Even at current levels, the RBI is already exceptionally highly capitalised. In fact, it is one of the most highly capitalised central banks in the world. So, it would seem to be more productive to redeploy some of this capital in other ways. Assuming that the RBI returns Rs 4 lakh crore of capital to the government, what are the uses to which this capital can be put? It could be used in several good ways: First, for recapitalising the banks and/or recapitalising a Public Sector Asset Rehabilitation Agency (PARA); Second, for extinguishing debt to demonstrate that the government is serious about a strong public sector fiscal position,” the Survey suggested in Volume I released in January.
A chief economist with a private sector bank, who did not wish to be named, said the government may need to create a special purpose vehicle to use resources from the RBI. “This is because the FRBM (Fiscal Responsibility and Budget Management) Act does not allow the government to borrow from the RBI,” the economist said. “But routing resources through the SPV should be in conformity with the law.”
The government plans to adopt a differential and selective approach for capital infusion in the public sector banks. While strong banks will get greater capital, weak banks may have to either shrink in size or not grow from the current position. Of the total 22 PSU banks, as many as eight PSU banks currently have gross non-performing assets (GNPAs) above 15 per cent and 14 banks have GNPA of more than 12 per cent.
The government had earlier hoped to reap significant windfall gains from the decision to withdraw Rs 500 and Rs 1,000 notes. The amount of currency that was not be deposited with the banks could have been a gain to the Centre — after extinguishing the RBI’s liability — which could have been used to capitalise PSU banks. But with over 99 per cent of the demonetised currency coming into the banks, the government took the recapitalisation bonds route to fund the banks.