INSUBCONTINENT EXCLUSIVE:
RBI would then deploy its surplus capital to recapitalise state-run banks, says Mr Subramanian.New Delhi: State-run banks need to be
fundamentally reformed by allowing majority private sector participation in them as a way forward in resolving the crisis of massive
non-performing assets (NPAs), or bad loans, former Chief Economic Advisor Arvind Subramanian has said
In his shortly to be released book "Of Counsel: The Challenges of the Modi-Jaitley Economy", published by Penguin, Subramanian argues for a
"grand bargain" between the government and the Reserve Bank of India (RBI) to resolve NPAs which have accumulated to a staggering Rs 13 lakh
crore, setting off a liquidity crunch and provoking a tiff between the Centre and the central bank."Fundamental reform of the PSBs (public
sector banks) is facilitated by allowing majority private-sector participation in the PSBs," Subramanian writes."In return, the RBI would
deploy its surplus capital to augment the resources for recapitalising PSBs and capitalising any new holding companies."The government's
differences with the RBI centres on four issues -- the former wanted liquidity support to head off any credit freeze risk, a relaxation in
capital requirements for lenders, relaxing the prompt corrective action (PCA) rules for banks struggling with accumulated NPAs, and support
for micro, small and medium enterprises.Central to the liquidity issue was the government's demand that the RBI hand over its surplus
reserves by making changes to the "economic capital framework"."Regulatory/supervisory reform is further achieved by granting the RBI
greater supervisory powers over public sector banks," Subramanian says.Taking some major names that have emerged in the banking controversy
like Vijay Mallya, Nirav Modi, Chanda Kochhar, Rana Kapoor and Ravi Parthasarathy, the former CEA says: "Hearing this roll call of names is
state of Indian banking for having allowed stigmatised capitalists to survive and thrive for so long".He also says that the recognition of
the NPA crisis through the RBI's PCA framework initiated in June 2015 is further advanced by sanctioning financial institutions that are not
classifying their loans properly, especially power-sector loans, at banks and other loans at non-banking finance companies (NBFCs).Besides,
the asset resolution process, as enacted by the Insolvency and Bankruptcy Code, is accelerated by sending smaller assets to specialised
distressed asset recovery firms, "while the powers sector assets would be shifted to a new government-run holding company"."The government
should also allow the RBI to implement the Prompt Corrective Action (PCA) framework for less strong banks," he said."Finally, check-ins and
oversight of the banking system must be in place to ensure that the shenanigans we have seen over the last several years from Vijay Mallya
to Nirav Modi to ICICI Bank to ILFS are minimized; they can never be fully avoided (regulation)," he added.While the NPA crisis is a legacy
of the lending boom during the high growth years up to 2010, the current liquidity crunch, particularly among non-banking finance companies,
follows a series of defaults last month by the privately-run Infrastructure Leasing and Financial Services and banks hesitating to lend
after a series of scams, most notably the Rs 14,000 crore fraud on state-run Punjab National Bank by two absconding jewellers Nirav Modi and
