Survey nudges central bank to give part of its R8 lakh-cr cash balance for the purpose; Centre could sell certain non-financial firms and use proceeds to make additional capital infusion
With the Reserve Bank of India (RBI) pushing banks to recognise all non-performing assets (NPAs), the Economic Survey nudged the central bank to give a portion of its Rs 8 lakh-crore cash balance to recapitalise the NPA-ridden public sector banks (PSBs).
FE was the first to report of such an eventuality on September 24, 2015 as the the additional burden of over Rs 1 lakh crore on salaries and pensions could jeopardise the Centre’s medium-term fiscal consolidation road map of reducing deficit to 3.5% of GDP in 2016-17 from 3.9% in the current fiscal.
Since the Centre’s finances are constrained, it could also “sell off” certain non-financial companies and use the proceeds to make additional capital infusion in the PSBs, said the finance ministry’s economists led by chief economic adviser Arvind Subramanian.
Of the Rs 8 lakh-crore balances with the RBI, its 2014-15 accounts showed Rs 2.43 lakh crore was accumulated internal reserves, while Rs 5.59 lakh crore was in unrealised gains due to periodic revaluation of gold and foreign currency assets booked in the currency and gold revaluation account.
The Survey pointed out that RBI’s equity (including reserves and contingency accounts) to assets ratio of 32%, was the second highest in the world, while it was less than 2% for both the US Federal Reserve and the Bank of England.
“If the RBI were to move even to the median of the sample countries (16%), this would free up a substantial amount of capital to be deployed for recapitalising the PSBs,” the Survey said, while acknowledging that such a step must also preserve the RBI’s independence, integrity and financial soundness. At the end of June 2015, the central bank’s assets stood at Rs 28.89 lakh crore. The RBI’s paid-up capital is R5 crore under Section 4 of the RBI Act, 1934. In August, the RBI had transferred an all-time-high dividend of R65,896 crore for FY15 to the exchequer.
Last August, the Centre had announced to infuse Rs 70,000 crore between FY16 and FY19, while the 22 PSBs would tap the market to raise an additional Rs 1.1 lakh crore. With NPAs rising sharply in Q3 of FY16, Moody’s has said the Centre has to frontload capital infusion in the PSBs, which might not be able to tap the capital market under the current circumstances.