Opinion Beyond capital

On Tuesday, the government said it was releasing Rs 22,915 crore as the first installment towards capital infusion into 13 state-owned banks to provide liquidity support and also to help them raise funds from the market. Banks weighed down by huge bad loans, a legacy of their lending during the go-go days of buoyant economic growth, have welcomed the infusion of funds though many analysts reckon the amount is inadequate considering the scale of challenges ahead. The government may have been guided by the views of the RBI which had earlier indicated that the funds set aside this year would be adequate, especially with the regulator tweaking the rules relating to revaluation reserves and deferred tax assets to make it easier for Indian banks to meet Basel III or global capital norms. Both the government and the RBI too have said in the past that capital would not be a constraint for local banks when credit growth picks up along with an economic rebound.While this latest liquidity support is bound to be cheered, the move also raises some fundamental issues. Primarily, it is the issue of public funds or taxpayer money being provided year after year for well over two decades to a set of intermediaries, without any intrinsic changes in the governance of these lenders. In any listed entity, investors who provide capital have a legitimate right to question the management and its promoters on the returns generated on these funds, which in the case of many state-owned banks is negative. In a sense, constant infusion of funds over the years by successive governments without ensuring structural changes and accountability may have created a problem of moral hazard. This government has started addressing some of these challenges, but the pace of change aimed at bringing about transformation in governance of these banks has been slow. A key recommendation of the P.J. Nayak committee was that the government should form a Bank Investment Company, which would act as a holding company to house

While this latest liquidity support is bound to be cheered, the move also raises some fundamental issues. Primarily, it is the issue of public funds or taxpayer money being provided year after year for well over two decades to a set of intermediaries, without any intrinsic changes in the governance of these lenders. In any listed entity, investors who provide capital have a legitimate right to question the management and its promoters on the returns generated on these funds, which in the case of many state-owned banks is negative. In a sense, constant infusion of funds over the years by successive governments without ensuring structural changes and accountability may have created a problem of moral hazard. This government has started addressing some of these challenges, but the pace of change aimed at bringing about transformation in governance of these banks has been slow. A key recommendation of the P.J. Nayak committee was that the government should form a Bank Investment Company, which would act as a holding company to house its the shares while paving the way for professionalising the running of these banks and their boards. The government has started implementing some parts of the Nayak committee recommendations, but there seems to be some ambiguity on a key one, which is to separate ownership and management or to ensure some distance between the two.In a way, this kind of financial support by any government to the sector is tantamount to socialising losses of private borrowers given that there are opportunity costs for public funds. The NDA government has argued often that the bad loans mess is a legacy issue. That may be the case, but, clearly, the time is opportune for a debate on the use of public funds, returns on it and long-term benefits besides accountability and improvement in the governance of banks.

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In a way, this kind of financial support by any government to the sector is tantamount to socialising losses of private borrowers given that there are opportunity costs for public funds. The NDA government has argued often that the bad loans mess is a legacy issue. That may be the case, but, clearly, the time is opportune for a debate on the use of public funds, returns on it and long-term benefits besides accountability and improvement in the governance of banks.