Panel proposes R35k-crore capital for PSBs every year

Written by Sunny Verma | New Delhi | Updated: Feb 9 2012, 08:12am hrs
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A committee headed by finance secretary RS Gujral has recommended that the government should pump in R35,000 crore of additional capital in pure equity into banks every year for the next 10 years.

The Committee on Capital Requirements of Financial Institutions, set up to outline a road map for capital infusion over the next 10 years, said in its report there should be no use of any innovative structures to augment the capital base of the public sector financial institutions.

The sum is more than double what the finance ministry has been struggling to put together this year to recapitalise banks including the State Bank of India.

We have given the report. It will be made public after finance minister Pranab Mukherjee reviews it, an official said. The capital requirement of banks over the next decade has been pegged at around R3.5 lakh crore to support a GDP growth of over 8%.

We have observed banks in the US and Europe are tweaking risk weights to augment capital base. But this sometimes results in banks masquerading debt as equity, said the official who is privy to the report. What we have suggested is that only plain-vanilla equity instruments should be used to capitalise financial institutions. Now, within this, the government can deploy common equity or preferential equity, he said, indicating that the report has not favoured other instruments of capitalisation such as shares with differential voting rights or hybrid capital either.

The recommendation would mean that the government would be required to pump in capital only in the Budget. Sequestering this level of capital would severely impact the Budget at a time the fiscal deficit is running high from expenditure on several social sector project commitments.

Capital infusion into public sector banks is however, critical to support their bankrolling of the economy. As a short-term measure, it is also necessary to provide for the rising non-performing assets in the system, which have grown at a faster pace as the economic growth has dipped from 8.4% in last fiscal to 6.9% in 2011-12.

Growth rate of NPAs during the first half of this fiscal has been the highest in the past six years, as per RBI data and is currently estimated at Rs 1,06,000 crore.

Moody's outlook on Indian banks issued in November had noted that they ranked at the low end versus their peers in Brazil, Russia, China and Southeast Asia in terms of capitalisation. This is in line with our view that, while the system's capitalisation position has improved from the level in mid-2000s, the improvement (is) marginal and is not sufficient to protect the sector from challenges, Moody's said.

Ficci secretary-general Rajiv Kumar said a better alternative would be to dilute government equity in these banks to shore up capital. Why use scarce budgetary resources, instead of raising the money from the public, he said.

The Gujral committee reviewed capital requirements to ensure that PSBs have a Tier-I capital of at least 8% of risk-weighted assets. The report has also taken into account the Basel III norms on capital adequacy, which will kick in from January 1, 2013 and has to be fully implemented by March 31, 2017.

The committee has also linked capital infusion to how well banks improve their efficiency. The report has also suggested ways in which banks can conserve capital and use it more efficiently.

Tier-I capital comprises of pure equity, disclosed reserves and perpetual debt. After the implementation of Basel III norms, which does not approve of perpetual debt as part of Tier I capital, the government will have to provide for equity to replace the perpetual debt.

The government plans to infuse up to Rs 17,000 crore this year into public sector banks, including Rs 7,900 crore of preferential equity infusion into the State Bank of India. In 2010-11, the government pumped in capital worth Rs 20,157 crore into PSBs including Punjab National Bank, Union Bank of India, Bank of Baroda, Oriental Bank of Commerce and Uco Bank.