The Reserve Bank of India, in its ?Report on Currency and Finance 2006-08?, said as banks will have to maintain capital for operational risks, overall capital requirements are likely to go up even if there is an expected decline in the capital required on account of credit risk.
Since most of the banks in India are at present operating at capital adequacy ratios higher than the prescribed level, meeting the Basel II requirements is not an issue in the immediate future. In the medium to long-term, however, banks would need to raise capital resources to keep pace with the expansion of their business. An assessment made in the report suggests that the total capital requirements in the five years 2007-08 to 2011-12 are projected to go up by about Rs 5,70,000 crore assuming that banks maintain CRAR at 12%, while the total capital requirements by public sector banks are projected to go up by about Rs 3,70,000 crore.
As regards the various options available to banks, more than 85% of the capital requirements in the past were met by banks through internally-generated resources. Apart from internal resources, banks have also headroom available to raise Tier 1 capital under innovative perpetual debt instruments (IPDI) and perpetual non-cumulative preference shares (PNCPS). In addition, some public sector banks have some headroom available to raise capital from the market and dilute the government?s shareholding to 51%.
On credit expansion in the industry, the RBI has said that although the share of credit to industry in total bank credit declined, credit intensity of the industry increased sharply. A cross-country survey suggests that the reliance of industry on the banking sector in India was higher than that in many other countries.
Banks in India have increased exposure in the infrastructure sector in recent years. However, increased credit intensity of the industry could not be explained by increased exposure to infrastructure alone. Credit growth in the SME sector, which slowed down significantly between 1996-97 and 2003-04, picked up sharply from 2004-05. However, the share of the SME sector in total non-food bank credit declined almost consistently from 15.1% in 1990-91 to 6.5% in 2006-07 and also in total priority sector advances from 43.6% at end-March 1998 to 17.9% at end-March 2006. It picked up marginally to 18.6% at March 2007.
This suggests that it is the large corporates that have increased their dependence on the banking sector. The major development that has taken place over the last decade is the diversification of credit in India towards retail. The share of retail credit comprising housing loans, credit to individuals, credit cards receivables and lending for consumer durables, in total bank credit increased from 6.4% in 1990 to 22.3% in 2007. On the whole, agriculture, large corporates and retail sector benefited from credit expansion, while credit growth to the SME sector remained tepid until recently.
