Banks must raise profitability before Basel-III kicks in: Govt

The government could manage Rs 15,000-20,000 cr per year for capital infusion in public sector banks

The need for capital infusion from the government will come down if banks are able to improve profitability before the Basel-III norms come into force, a top finance ministry official said on Tuesday.

Internal accrual is the first option that the government is looking at, said Sunil Soni, additional secretary at the department of financial services.

The banking regulator had released the final guidelines for Indian banks on Basel-III this May 2012. Banks will have to comply with these norms between January 2013 and March 2018. "In the preparatory phase, if banks can improve their profitability, perhaps the need for capital from government will go down to that extent," Soni said. If banks earn well they can raise funds from the market , he added.

The government could manage Rs 15,000-20,000 crore per year for capital infusion in public sector banks. "If it goes beyond that, then we have a problem," said Soni on the sidelines of a conference.

The government has set aside Rs 14,000 crore to fund banks this financial year. Soni said the amount might have to be increased in 2015 if other options don't work out. "First option is internal accrual, second is government equity.”

Last week, Reserve Bank of India (RBI) Governor D Subbarao had highlighted that the government would need to infuse Rs 90,000 crore into public sector banks if it wanted to maintain its shareholding under Basel-III norms by 2018. He said the burden would come down to less than Rs 70,000 crore if the government was willing to reduce the shareholding to 51 per cent.

Presently, the government intends to hold at least 58 per cent stake in public sector banks. Reducing the government's stake in public sector banks was a political decision, said Soni.

The government has asked public sector banks to set up 110 branches specifically to cater to the needs of small and medium enterprises. To start with, Dena Bank, Oriental Bank of Commerce, Corporation Bank and Indian Bank have been asked to set up specialised branches on an experimental basis, said Soni.