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RBI’s excess capital could be used by state-run banks: Arvind Subramanian

Arvind Subramanian believes that the extra funds could be used to re-capitalize state-run banks

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New Delhi: Former Chief Economic Advisor Arvind Subramanian’s statement comes when there already is an overflow of news of power tussle in between Center and the central bank RBI. He previously stated that he strongly supports Government’s point of view of using RBI’s excess funds in re-capitalize state-run banks. As per reports, the Reserve Bank of India has extra funds between Rs. 4.5 and Rs. 7 lakh crore. He further clarified that deploying funds to banks occurs under the sole discretion of the RBI  and it must do “voluntarily and proactively without even the whiff of interference from outside”.

Subramanian said that he also realized that he is put himself in an unfavorable position with respect to eminent current and former RBI officials.

“These officials command the respect of the public, and for good reasons. I think they are wrong. As Margaret Thatcher used to say, ‘One man and the Truth is a majority’,” the noted economist says in his upcoming book “Of Counsel: The Challenges of the Modi-Jaitley Economy”, published by Penguin.

“It is almost certainly the case that more money will be needed to make banks healthy… It is possible that the government will need to provide anywhere between Rs. 3-5 lakh crore — in addition to the amounts already spent — to restore the fundamentally viable public sector banks to health,” Subramanian says.

He adds that only RBI has a strong balance sheet to undertake such a large scale operation.

“Conservative estimates (as well as cross-country comparisons) based on our internal analysis suggest that if the RBI were to adopt the practices of most major central banks around the world in deciding how much capital is necessary, it would find that it has about Rs.3-4 lakh crore of excess government capital, some of which it could deploy for the clean-up,” he says.

Subramanian adds that RBI is an outlier among major central banks, holding about 28 percent in capital, which is the fifth-largest among all major central banks, with two of the four above India in this ranking being oil exporters, which are special cases being highly vulnerable to the swings in the price of petroleum.

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