New Delhi: A day after the government announced Rs 2.11 lakh-crore infusion in PSU banks, chief economic adviser Arvind Subramanian admitted that it will raise “moral hazard question: isn’t this a bailout of the bad lending and borrowing decisions of the past.”
He also made a case for consolidation saying the country should ideally have 5 to 7 large lenders. “To some extent, moral hazard is unavoidable. In the real world there are no costless actions, policy makers have to balance the perverse incentives created against the necessity of reviving the economy and creating growth and jobs. But moral hazard must be minimised and that is where reforms come in,” he said.
Mr Subramanian said reforms will ensure that the problems that India has faced over the last few years will not recur in the future. He added that reforms to accompany the recapitalisation would be formulated in the period ahead.
“In the current circumstances, what are some of the key reforms that will be necessary to make the package announced even more effective, the uber-Brahmastra?,” CEA said. He said banking reforms must be animated by a vision of where “we think the banking sector should be in say 5-10 years, financing a double-digit growing economy.”
The CEA added that there is a view that there are too many banks and a few unviable ones. “The aim must be to shrink or narrow the scope of the unviable banks as former RBI Governor Y.V. Reddy has argued. In this view, recapitalisation must be selective and incentive based, directing it to those banks where the bank for buck in terms of new credit creation will be maximum,” he said.
The CEA said that since all banks must maintain a minimum capital adequacy, one possibility would be to recapitalise the unviable banks only to the extent necessary to finance their current balance sheet size while explicitly not providing for their growth. He said that in an ideal world, India needs to have both public and private banks, competing domestically and being competitive internationally.
