Rajan opposes using RBI funds to recapitalise public sector banks

Rajan said RBI should pay as much dividend as possible to the government, which over the past two years has run into billions of dollars

Outgoing governor Raghuram Rajan on Wednesday rejected suggestions for Reserve Bank of India to infuse its surplus funds to capitalise ailing public sector banks -- proposed by Chief Economic Advisor Arvind Subramanian -- saying it is a "non-transparent" idea that can create "conflicts of interest".

Rajan, who last weekend surprised everyone by making public his no to a second term, said RBI should continue paying as much dividend as possible to the government, which in turn should be recapitalising the public sector banks.

"The Economic Survey has suggested the RBI capitalise public sector banks. This seems a non-transparent way of proceeding, getting the banking regulator once again into the business of owning banks, with attendant conflicts of interest," Rajan told an Assocham event.

The suggestion made in this regard in the latest Economic Survey, prepared by Chief Economic Advisor Subramanian, is has reportedly found traction with the government, though there is no official word in this regard as yet.

Rajan, however, said rather than this, RBI should pay as much dividend as possible to the government, which over the past two years has run into billions of dollars.

Rajan, who will return to academia after his three-year term at RBI ends on September 4, added that RBI has paid the surplus to the government for the last three years.

In 2013-14 the RBI had transferred a surplus of Rs 52,679 crore (Rs 526.79 billion) to the government, which in 2014-15 rose to Rs 65,896 crore (Rs 658.96 billion). The surplus transfer in 2010-11 was much lower at Rs 15,009 crore (Rs 150.09 billion).’

According to a media report published days after Rajan's surprise decision, the government is mulling to use up to Rs 4 trillion of RBI capital.

The governor stressed that the government should continue to capitalise its banks and clarified that a higher dividend payout by RBI and bank-recapitalisation should not be linked.

If the government cannot arrange the required capital, Rajan suggested issuing to the banks "government capitalisation bonds" in exchange for equity.

"The banks would hold the bonds on their balance sheet. This would tie up part of their balance sheet, but would certainly be capital," he explained.

Till 2007, RBI was holding nearly 60 per cent stake in the public sector lender SBI on behalf of the government.

However, this stake was transferred to the government after amendments to the relevant acts, as it was felt that it was inconsistent with the principles of effective supervision that the regulator (RBI) was also an owner of a bank (SBI).

In the Economic Survey, Subramanian, who is among those being speculated in race to succeed Rajan at RBI, had first spoken about deploying the RBI's capital to bolster the state-run banks' buffers.

Incidentally, Subramanian became the latest target of a tirade by BJP leader Subramanian Swamy, though Finance Minister Arun Jaitley came in his strong defence and the party also distanced itself from Swamy's comments.

Photograph: PTI