Banks need to raise capital: Subbarao

Reserve Bank of India (RBI) Governor D Subbarao said banks would need to increase their capital going forward to meet rising credit demand.

“Our banks are well capitalised, at the aggregate level some banks might have to bring in more capital. But the problem is going forward as credit demand will go up. And as banks will be required to meet that credit demand you (banks) will have to increase the capital,” he said.

Subbarao made these comments at a Conference of Chief Executive Officers of Banks organised by the Centre for Advanced Financial Research and Learning last week. The RBI put up a video of the lecture on its website on Wednesday.

Banks’ loans in the fortnight ended May 6 stood at Rs 39.57 trillion, up Rs 383.84 billion from the previous fortnight.

On Basel III norms, Subbarao said the cost of implementing them would drive up the cost of credit and hurt the competitiveness of banks.

He said the implications of the second quantitative easing by the US for the rest of the world are not clear. In its second quantitative easing programme, the US Federal Reserve is set to buy bonds worth $600 billion by June. “It is doubtful to what extent QE2 (second quantitative easing by the US) has been good and bad for the rest of the world,” Subbarao said.

On emerging markets, he said the concerns of these economies are seldom discussed at international level meetings, mainly because of limited research. Subbarao said the Centre for Advanced Financial Research and Learning can play a key role in helping India take an important position at the international level and making the country's financial sector more knowledge-based.

“I have been saying over the last two-and-a-half-years, the Reserve Bank of India must become a knowledge institution. But, I think the financial sector at a larger level must become a knowledge-based financial segment. That’s how we will thrive in this competitive globalising environment,” Subbarao said.

On the global financial crisis, the RBI governor said India was largely unaffected by the crisis but the changes it brought about have relevance for India.

So, banks must take another look at their business strategies in the context of the evolving regulatory, macroeconomic and socioeconomic architecture, Subbarao said.

“Although we believed that we remained healthy before, during and after the crisis even then I believe that what's happening around the world the new reforms have relevance for us. Hence, there is a need to revisit the business strategies in the emerging regulatory architecture,” he said.