In October 2011, Moodyís downgraded SBI because its Tier I capital adequacy ratio dropped below 8%. Although the government has since made this up by infusing some R8,000 crore into the countryís largest lender, the downgrade showed just how vulnerable PSU banks are. So unless the government is able to give PSU banks the capital they need, or lower its equity share in them, itís a near certainty India Inc, especially the smaller firms, is going to see a big gap in its capital requirements since PSU banks account for the lionís share of loans today. Take a modest 17% annual growth in credit over the next 5 years, apply a flat 8% capital adequacy figure to this and you come to a figure of R8 lakh crore of capital requirement. If you take a 9% capital adequacy, you need Rs 9 lakh crore. Assuming the government owns at least 51% of PSU banks, thatís around R4-4.5 lakh crore it needs to provide over the next 5 years, but doesnít have the budgets for this.
This is where the Banking Laws (Amendment) Bill, passed by the Lok Sabha after the finance minister dropped the controversial commodity futures clause, is so important. Theoretically, foreign banks can be expected to plug in the shortfall, but itís not clear how many banks would be interested in venturing out beyond the larger cities. India clearly needs more banks, both for the capital they will mobilise and the new product innovations they will bring. Indian banks