Mumbai: Acknowledging difficulties in recapitalisation of public sector banks, Prime Minister's Economic Advisory Council chairman C Rangarajan on Thursday said reduction in stakes by the government is fraught with "political problems".
"The other alternative of reducing the share of the government in public sector banks poses difficult political problems," Rangarajan said addressing a financial summit organised by the industry lobby Ficci and IBA here.
His comments come within two days of Reserve Bank Governor D Subbarao stating that if the government decides to maintain its stake at 57 percent, it will have to pump-in Rs 90,000 crore while if it decides to bring it down to 51 percent, it would need to infuse Rs 70,000 crore.
Given the difficulties in arranging money by the government, Subbarao had also suggested diluting government stake in banks below 51 percent.
RBI has mandated domestic banks to make the migration to Basel-III by end of FY'18. In order to avoid repeats of financial sector crisis like the one in 2008, a committee of central bankers from across the world came up with the Basel-III norms, which ask for higher capital buffers and also have some re-classifications.
Rangarajan on Thursday said given the large scale infusion needed into 26 public sector banks, a long-term programme will have to be drawn up by the government.
If the government fails to re-capitalise, "the market share of the public sector banks will come down", Rangarajan said, hinting at the bank's potential inability to lend given limited capital buffer.
In his address, Rangarajan also called for a "periodic entry" of new banks if the Indian banking system was to remain competitive over time.
"A closed system can only become oligopolistic," he warned.
Incidentally, the Finance Ministry has been sitting on a proposal to make necessary changes to regulatory aspects for allowing entry of new banks.
No new domestic lenders have come on the scene of commercial banks for nearly a decade now, Yes Bank and Kotak Mahindra Bank being among the last ones to get banking licence.
Rangarajan also expressed concern about deterioration in asset quality of banks in the current slowdown but said that the gross non-performing assets are lower compared to the historic high.