Indian Bank recapitalisation to cost Rs 14 bn - Views on News from Equitymaster

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Indian Bank recapitalisation to cost Rs 14 bn

Sep 3, 1999

According to newspaper reports, the government is likely to infuse upto Rs 14 bn into Indian Bank through recapitalisation bonds. The move is aimed at shoring up the bank's net worth, which has been fully eroded by the past year's losses. Indian Bank has also initiated measures to recover non-performing loans. The Bank has achieved some measure of success in recovering bad loans. The Central Government has continued to support weak banks even though its fiscal position has been deteriorating. Although the actions may be justified as related to public welfare, there are no visible systemic changes that have taken place at the banks to ensure that they will not find themselves in similar situations again.

The Government has failed to use the method involving the set up of the Asset Reconstruction Company (ARC) to deal with the problem of non-performing assets (NPAs) at banks and financial institutions. Under this method, the ARC would buy out the NPAs of the banks and later proceed to recover them. Overall this method is quicker and ensures that the concerned entity is able to start on a clean slate with immediate effect. Moreover, the entire burden of the entity's revival does not pass onto the Government. There is also a possibility that the ARC is able to recover a large part of the loans, and turn in a profit, which would then be distributed amongst the promoters-largely the government.

The Indian banking sector is highly fragmented with the existence of a large number of marginal players. These banks have continued to exist due to the support of mainly the Government. However, with competition getting hotter, it is unlikely that the banking sector will survive for long in its current form. What is required is large-scale consolidation and employee and branch rationalisation to increase efficiency of the banking sector.

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