Wednesday, June 24, 2015

Recapitalisation pf PSBs

This refers to your editorial ‘Recapitalisation of PSU banks must be based on performance’ (business Standard dated 24/6/2015). The need to strengthen the capital base of public sector banks in the context of ever increasing business and business risks is paramount but driving good money after bad money particularly tax payers money needs to be given a serious thought in the background of banks’ continuous bleeding thanks to staggering non performing loans and deteriorating performance of non professional boards. As rightly observed, the money distribution should be based on performance and the  performance criteria should be on the basis of banks contribution towards GDP growth, capital formation in the country, capital output ratio, industrial and agricultural expansion, financial inclusion, gross non performing assets and loans and the Customer service efficiency ratio. The boards’ performance cannot and should not be simply assessed based on the balance sheet size which often and invariably gets lavishly window dressed. Also, the banks cannot and should not take for granted the capital support from the budgetary sources and this needs to be achieved through their contribution to improve the over all economic development and inclusive growth. Make the Banks’Board professional and fully accountable before support is extended.

Dr T V Gopalakrishnan


2 comments:

FINCOP said...

I fully agree with you. Banks in India finance from jan dhan to infrastructure. We have learnt that a good credit analyst should know the enterprise, entrepreneur and environment thoroughly to be able to assess the risks involved properly. There is more arrogance than understanding of the three aspects and the Boards' mouths are full for the limited hours of deliberations and clearance of table matters expeditiously. Otherwise, how do we understand that the Kingfisher has been financed on the basis of the collateral of 'brand value' - the intangible asset? The tragedy is that the regulators get represented on the board.

K.Kanagasabapathy said...

I feel that some objective performance criteria would be useful to discriminate between good, bad and worse. Otherwise, the worst will be rewarded more as a free rider at the cost of the rest. That would lead to the moral hazard problem.
It is true that some accountability is also needed in terms of an MOU to reach some prefixed targets--along with additional capital provision; this was the principle followed in mid-nineties when first set of recapitalisation measures were taken.
Regards,
KSabapathy