An unfair advantage

Government must look at the long-term picture, stop bailing out public sector banks

The government proposes to inject additional capital into public sector banks yet again. Time and again, these banks have needed a fresh infusion of capital. While private banks like HDFC and ICICI grow their balance sheets by making profits and retaining them, public sector banks keep turning back to the taxpayer to pay for their inability to make profits. The latest reason for asking for more equity capital is to meet the regulatory requirements for keeping a higher buffer due to international prudential regulations.

The regulatory requirement of holding capital in a higher proportion to the balance sheet could arguably have been met in a number of ways. Banks have known that higher capital requirements were being introduced and had time to prepare for it. One way was through additional equity offerings to the public. This could have been made possible for public sector banks had the government taken a decision to reduce its share below 51 per cent. Instead of going to Parliament to ask for more money to spend in an already bad fiscal situation, the government would have done better to persuade lawmakers to amend the two Bank Nationalisation Acts that Indira Gandhi had sprung on the nation in the heyday of Indian socialism. This might have been a reformist step forward. The model could have been HDFC and ICICI, which moved away from being owned by the government to being widely held by the public.

Another way to meet the capital requirements would have been to reduce the size of the balance sheet of banks that are unable to meet the regulatory requirements. Banks have had time to slow down their growth and thus need less capital. But public sector banks (PSBs), knowing they could get tax-payer money, did not do so. A third way was to become more profitable. But PSBs also did not make more profits and support higher capital needs through retained profits. Already, these banks have an edge over private sector banks because people correctly perceive government ownership to be a guarantee that the bank will never fail. This allows them to attract business, as was seen to happen after the global financial crisis. Over and above this, when PSBs get recourse to taxpayers' money, instead of being nudged to become more efficient and profitable, they are given a further unfair advantage. This makes the playing field for non-public sector banks even more unequal. It is time for the government to stop bailing out public sector banks.

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