If the government wants the economy to achieve 8% growth in the coming years, it needs to augment the capital of public sector banks (PSBs), lest stricter capital norms under Basel-III stifle their capacity to finance the needs of the economy.

Basel-III norms, aimed at making banks more resilient in times of stress, will kick in from January 2013 and prescribe more high-quality equity capital for banks.

RBI had estimated public sector banks would require R1.5 lakh crore extra capital over the next six years over and above internal accruals. Of this, nearly half would be due to Basel-III norms.

For 2012-13, the government is likely to infuse not more than R15,000 crore into public sector banks. In the previous financial year, the centre had budgeted an infusion of R6,000 crore.

In next five years, the amount of recapitalisation will be higher and the exchequer will have to foot the bill or give up a part of its stake in banks where it has more than 51%. RBI’s estimate of required capital is based on the assumption that all banks? risk weighted assets will grow at 20% per year and internal accruals will amount to at least 1% of risk weighted assets. PSBs’ assets have been growing by around 20%, even in the aftermath of the global financial crisis. In 2011-12, when economic growth was just 6.5%, PSBs? assets grew by an average 18% and loan growth was 17%.

Considering that economic growth is expected to pick up and the government?s own estimate is 8% for 2013-14, PSBs? risk weighted assets could grow at a pace faster than the 20% seen so far and their credit growth would also pick up.

Rough calculations show that assuming a 25% growth in risk weighted assets and 18-19% credit growth, only the top five PSBs will require around R50,000 crore more capital in 2013-14 and more than R75,000 crore thereafter.

State Bank of India would require over R20,000 crore and Punjab National Bank could need R9,000 crore. Indeed, a large part of this capital would come from internal accruals of the PSBs.

However, with the exponential rise in restructured assets and bad loans and the consequent provisioning requirement, the profit for plowing back is unlikely to grow at a strong pace. The government’s accomodation as the largest shareholder will be sizeable too.

RBI has estimated that the government may have to infuse around R90,000 crore into PSBs for the banks to meet Basel-III norms. That would mean an infusion of at least R18,000 crore every year. So far, the government hasn’t been near this figure.

Numbers assumed here are one of the many scenarios that can be looked upon but the moot point is that PSBs’ capital requirements are going to shoot up. Is their largest shareholder listening?