viral v acharya : the unfinished ageda - restoring public sector bank health in india speech by dr viral v acharya, deputy governor of the reserve bank of india, at the 8th r k talwar memorial lecture, organised by the indian institute of banking and finance, mumbai, 7 september 2017. * * * i would like to thank vaibhav chaturvedi, b nethaji and vineet srivastava for valuable inputs, as well as my co - authors, tim eisert, christian eufinger and christian hirsch ( parts of the japanese and the european stories are based on joint work with them ). all errors remain my own. views expressed do not necessarily reflect those of the reserve bank of india. good evening, friends. i am grateful to the indian institute of banking and finance ( iibf ) for inviting me to deliver the 8th r k talwar memorial lecture. every institution must remember, venerate and celebrate the immense contributions of those who helped lay down and solidify its character for future generations to build upon. principles, careers and lives such as those of mr talwar inspire us, as in henry wadsworth longfellow ’ s the psalm of life : lives of great men all remind us we can make our lives sublime, and, departing, leave behind us footprints on the sands of time ; footprints, that perhaps another, sailing o ’ er life ’ s solemn main, a forlorn and shipwrecked brother, seeing, shall take heart again. i hope that i can do some justice today to the rich legacy left behind by mr talwar, considered as the state bank of india ( sbi ) ’ s greatest chairman, the father of small scale industries in india, a banker ahead of his times who put tremendous emphasis on a comprehensive credit appraisal culture at sbi, and someone who had the courage to stand up against political pressure on his bank to undertake targeted lending to undeserving borrowers ( an episode recollected in a booklet by another stalwart of indian banking, mr narayanan vaghul ). i was originally planning to speak on “ monetary transmission in india : issues and possible remedies ”, but i have since had a change of heart. the reserve bank ’ s internal committee on improving monetary policy transmission will be finishing its report by the last week of september. i should neither pre - judge nor pre - announce its findings. therefore, and

huge proportion of economy ’ s savings that they receive as deposits ; can we end the indian story differently from that of japan and europe? the government of india has been infusing capital on a regular basis into the public sector banks, to enable them to meet regulatory capital requirements and maintain the government stake in the psbs at a benchmark level ( set at 58 per cent in december 2010, but subsequently lowered to 52 per cent in december 2014 ). in 2015, the government announced the “ indradhanush ” plan to revamp the public sector banks. as part of that plan, a program of capitalization to ensure the public - sector banks remain basel – iii compliant was also announced. however, given the correctly recognized scale of npas in the books of public sector banks and the lower internal capital augmentation given their tepid, now almost moribund, credit growth, substantial additional capital infusion is almost surely required. this is necessary even after tapping into other avenues, including the sale of non - core assets, raising of public equity, 9 / 11 bis central bankers'speeches and divestments by the government. the cabinet committee on economic affairs has recently authorised an alternative mechanism to take decision on the divestment in respect of public sector banks through exchange - traded funds or other methods subject to the government retaining 52 % stake. synergistic mergers may also be part of the broader scheme of things. the union cabinet has also authorized an alternative mechanism for approving amalgamation of public sector banks. the framework envisages initiation of merger proposal by the bank boards based on commercial considerations, which will be considered for in - principle approval by the alternative mechanism. this could provide an opportunity to strengthen the balance sheets, management and boards of banks and enable capital raising by the amalgamated entity from the market at better valuations in case synergies eventually materialize. all of this is good in principle. there are several options on the table and they would have to work together to address various constraints. what worries me however is the glacial pace at which all this is happening. having embarked on the npa resolution process, indeed having catalysed the likely haircuts on banks, can we delay the bank resolution process any further? can we articulate a feasible plan to address the massive recapitalization need of banks and publicly announce this plan to provide clarity to investors and restore confidence in the markets about our banking system? why aren ’ t the bank board approvals of