As capital infusion for public sector banks (PSBs) by the government is also about committing tax payers’ money, the RBI said this calls for enhanced efficiency and capital conservation rather than an equitable distribution of scarce capital.
On the other hand, while there is no dispute over the need for buffering banks with adequate capital, this may not ensure asset quality and hence the overall strength of the balance sheet.
The RBI’s observation comes in the backdrop of the government capitalising only nine out of 22 PSBs in FY2015 on the basis of their return on assets and return of equity.
Chiefs of PSBs, which did not receive capital, termed this select infusion as a bolt from the blue. Given that their share valuations are currently not attractive for them to tap the equity market, the government now seems to be having a re-think on its strategy of select capital infusion.
The Financial Stability Report (FSR) observed that a reorientation of the performance evaluation of the top management (chief executives) of PSBs to specifically incorporate stock market valuations will reduce ‘principal-agent’ problems inherent in such a relationship and will also reflect the true marginal cost of capital relevant for recapitalisation.
The ‘principal-agent’ problems occur when one person/ entity (the agent) makes decision on behalf of or that impact another person/ entity (the principal).
The report pointed out that in terms of public perception PSBs, with implicit government support, are considered to be relatively immune to destabilising impact though it has an efficiency imperative, when judged by their returns on asset or capital employed.
However, the same sense of safety eludes PSBs when it comes to their valuations.
“With the government thinking of new performance-based norms for capital infusion, this disconnect is sought to be addressed.
“There may be a notion, albeit an incomplete one, that with the government deciding on performance-based parameters for identifying banks which deserve fiscal support, those that are not up to the mark might find it even more difficult to raise capital,” the FSR said.