Avoid PSB recapitalisation pitfalls

The govt must announce the criterion for capital allocation without delay

The government’s Rs 2.11-trillion recapitalisation plan for public sector banks (PSBs), although widely welcomed, carries a risk that history may repeat itself. This is the moral hazard of recapitalisation.

The comfort that the government would again bail them out may lead PSBs to resort to inadequate project appraisal and credit monitoring, and again land up with burgeoning non-performing assets (NPAs) down the road. Additionally, incentive by way of higher capital by reckless credit provisioning cannot be ruled out in the near term. This has to be avoided at any cost, but more of it later.

For now, recapitalisation benefits seem