Capital constraints

Updated: Feb 22 2014, 05:30am hrs
While the government has allocated Rs 11,200 crore for capital infusion into the state-owned banks for 2014-15 in the interim budget, it is much less than the estimated Rs 25,000-30,000 crore that these banks would need to meet a minimum

Tier 1 ratio of 8% in FY15. The budget capital infusion for FY15 is also far less than what the government had infused into public sector sector (PSU) banks in the past three years. In FY14, the government has infused Rs 14,000 crore into PSU banks, Rs 12,500 crore in FY13 and Rs 12,000 crore in FY12.

The Reserve Bank of India estimates banks would need around Rs 1.4-1.5 lakh crore of common equity to be fully complaint with Basel III norms by 2018. So, this would mean that the government will have to allocate Rs 20,000 crore of capital in banks every year to retain its 51% stake. Lower internal accruals on the part of banks will also mean that the government will have to pump in more money. A Credit Suisse estimates suggests that PSU banks will need additional capital of Rs 2.16 lakh crore for the next three years if loan growth is to be in the 18% range. If so much of capital infusion does not take place in these banks, loan growth would be in the range of 10-12% a year.

With growing non-performing loans (NPL), the need for external capital for public sector banks has risen significantly. As a result, internal capital generation will be insufficient to fund loan growth. A Moody's research note underlines that because of rising NPLs and lower profitability, provision expense rose to 65% of the agency's rated public-sector banks' pre-provision income for the first three quarters

of the FY14 from 49% a

year earlier.

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