Mumbai: Some nationalized banks need to be re-privatized, to reduce the amount of capital that the government needs to infuse in them and help maintain fiscal discipline, said Viral Acharya, deputy governor of the Reserve Bank of India (RBI) on Friday.

“This (reprivatization) will reduce the overall amount that the government needs to inject as bank capital and help preserve its hard-earned fiscal discipline, along with stable inflation outlook and the diverse nature of our growth engine," Acharya said at an event in Mumbai.

The gross bad loans of government banks stood at Rs6.15 trillion as of December 2016.

“Clearly more recapitalization with government funds is essential. However, as a majority shareholder of public sector banks, the government runs the risk of ending up paying for it all. The expectation of government dole-outs has been set by the past practice of throwing more good money after bad," he said.

To curb this practice, Acharya spelt out five options for resolution of the stress on public sector banks’ balance sheets:

One, healthier public sector banks could raise private capital and thus reduce the government’s burden of recapitalizing banks.

Two, some banks with assets or loan portfolios that are in good shape can sell them on the market. Such asset sales can generate some of the needed capital.

Three, a consolidation exercise that leads to fewer but healthier banks.

Four, under-capitalized banks could be subjected to corrective action, such as under the revised Prompt Corrective Action (PCA) guidelines recently released by the RBI. Such action would entail no further growth in deposit base and lending for the worst-capitalized banks. This would ensure a gradual “run-off" of such banks, and encourage deposit migration away from the weakest public sector banks to healthier public sector banks and private sector banks.

Under the PCA framework, banks will be assessed on three parameters, namely capital ratios, asset quality and profitability. Failure to meet any of these norms could invite RBI action, which could include restrictions on branch expansion, change in management and reduction in assets.

Five, the measures listed above would improve the overall health of the banking sector, creating an opportune time for the government to divest some of its ownership in the restructured banks.

The government is infusing Rs70,000 crore in state-owned banks over four years starting from financial year 2015-16 under the Indradhanush programme. Of this, Rs50,000 crore is the allocation for the first two years, with the balance split between financial years 2017-18 and 2018-19.

On Wednesday, RBI governor Urjit Patel had also hinted at a consolidation in public sector banks.

“The weaker banks are losing market share (and) that is a good thing. The stronger banks are gaining market share...those who need to shrink are shrinking," Patel said.

The finance ministry recently laid down specific targets for 10 public sector banks for receiving future capital infusion under the Indradhanush programme.

“It (re-privatization) would be a viable way for the government to realize value. The regulator can make suggestions but it is up to Parliament to decide, being a policy matter," said Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services Llp.

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