'PSBs' credit expansion may be capped due to capital needs'

Availability of capital may cap public sector banks’ credit expansion in the coming years.

“Given, the current government policy of no stake dilution below 51 per cent, capital for the public sector banks will have to come from the government budgets, banks' own resources and from public issues,” C Rangarajan, Chairman of Economic Advisory Council to the Prime Minister, said here.

“The availability of capital through budget sets a limit on the extent of expansion of credit by these banks,” he said.

The government has budgeted Rs 6,000 capital infusion in public sector banks in the current fiscal year after injecting Rs 20,157 crore in 2010-11.

But Rangarajan feels that government will have to bring in Rs 4,000-10,000 crore supplementary demands for grants to meet capital requirements of banks.

“A long-term programme of injecting capital into the public sector banks will have to be drawn up. Otherwise, the market share of public sector banks will have to come down and the slack will have to be taken by the existing and new private sector banks,” he said.

The capital adequacy ratio for all scheduled commercial banks is currently estimated at 14.17 per cent.

On Friday, Namo Narai Meena, minister of state for finance, said the government had approved Rs 14,000 crore capital infusion in state-run banks in 2011-12. Banks had asked for Rs 18,000 crore capital.

Rangarajan also favoured allowing new players including corporate business entities to enter the banking space. “There should be no bar on the entry of new banks...A closed system can only become oligopolistic,” he said.

ASSET QUALITY
Rangarajan warned non-performing assets on banks' books may rise in the current financial year because of high interest rates and slow economic growth.

“The Indian banking system is also exposed to some sectors of the economy such as power and aviation, which are not doing well. Non-performing assets in these areas will need continuous watch by banks,” he said.

Banks should also be cautious of liquidity risks that may expand because mismatch in maturity of assets and liabilities. “Increased exposure to real estate and infrastructure will lengthen the maturity of bank assets,” Rangarajan said.

He added banks should improve bad loan recoveries and operational efficiencies as de-regulation of savings deposit rates, new capital rules and financial inclusion obligations will keep the lenders’ profitability under pressure.