Govt, RBI and 15th Finance Commission discuss bank recapitalisation

The Fifteenth Finance Commission is in discussions with the Centre and the Reserve Bank of India on the issue of bank recapitalisation, Commission Chairman N K Singh said on Monday.

The banking sector needs to open up to the same levels of ‘liberalisation process’ which other sectors have witnessed, Singh said.

“We need to have a far more decisive and significant banking recapitalisation plan. I think that over the next five years a huge public outlay will be needed to keep state-owned banks properly and adequately capitalised,” Singh said at an event organised by the All India Management Asso­ciation. “The Commission is in consultation with the government and the RBI on the needs of bank recapitalisation for the next five years or so which is the period of our award,” Singh said. The Commission is expected to submit its report for 2021-22 to 2025-26 by end-October.

“The banking sector has been relatively closed since nationalisation and should be visited by the same kind of liberalisation process, which other sectors have seen,” Singh said.

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Economic Affairs Secretary Tarun Bajaj had told Business Standard earlier that the Department of Financial Services is looking at a plan of bank recapitalisation. This comes even as the RBI has warned that but the Covid-19 crisis could push up non-performing assets quite significantly. The gross NPA ratio of banks may increase from 8.5 per cent in March to 12.5 per cent by March 2021 under the baseline scenario, but it could worsen to as much as 14.7 per cent under a “very severely stressed scenario,” it said last week.

Singh said India would see a sharp V-shaped recovery in the third and fourth quarters of the current fiscal, but FY21 GDP growth would ultimately be in negative territory as the coronavirus lockdown led to serious demand and supply dislocations. “Q1 and Q2 will not be lofty performances to say the least, I think Q3 and Q4 of the current fiscal year, there would be a very sharp V-shaped recovery, not necessarily that anything fundamental will happen or may happen but because of a lower base. None­theless, fiscal year as a whole would end on a negative trajectory,” he said.

Singh said the ideal debt-to-GDP ratio should be 60 per cent and to reach that level in the medium term would require fiscal deficit to be aligned to this debt objective.