Govt Banks and Capital Adequacy
This has reference to the news item 12%by 12: Govt banks lineup for cash-loading(ET dated 14th Sep 2009).It has become a fashion among Govt Banks to look forward to Govt for capital support to maintain the capital adequacy ratio prescribed/expected by the Regulator to ensure soundness of banks' functioning in terms of the risks they build up.
The real risk coverage has to come from within and not by induction of Govt funds ie public money. Banks have to learn to expand business and capital through effective and efficient management of their credit portfolio,investments and off balance sheet items. The very system of subsidizing bad credit by all stakeholders of banks particularly by depositors and shareholders which include Govt has to be necessarily stopped and there should be a way out to take care of formation of non performing loans and to stand on banks own legs without depending on Government or other stakeholders in case a situation of build up of bad loans more than reasonable limits,write off of loans,more provisional requirements and lowering of profits arise due to internal reasons or external factors beyond the control of banks.
Since Non-performing loans are inevitable in banking business,it is better to have a fund mobilised from all borrowers,banks themselves and if unavoidable from Government and RBI by way of small premiums based on certain norms having relevance to healthy and acceptable practices. Dependence by banks on Govt funds to support their capital base only reflects on their inefficiency in running the business.This fund which can be styled as Precautionary Margin Reserve Fund(PMR), on accumulation over a period, can take care of future NPLs,discipline credit portfolio and strengthen the balance sheet. Implementation of this idea will turn out to be a win-win situation for banks,their stakeholders and the government.
Dr.T.V.Gopalakrishnan.
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Govt. banks are lethargic and lackadaisical in their functioning partly due to this invisible hand of the govt. to rescue them from trouble. It may be better to dissolve one or two banks as and when they fail.This may help to bring in some accountability into system of public sector banking in India.BIS is also working on building up of countercyclical capital buffers in the banking system.Our public sector banks can benefit from the suggestion of DR TVG in regard to gradual build up of capital from out of borrower contribution
Lingaiah
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