PSBs must use market to raise risk capital: RBI official

RBI executive director N S Vishwanathan hinted that PSB's dependence on the govt should become less over period

Public sector banks (PSBs), which control about 70 per cent of the loan market, should use capital infused by the government for growing their business instead of deploying it to manage risk from the current loan book, a senior Reserve Bank of India (RBI) official said on Monday.

State-owned lenders should rely more on other resources for capital, he said, hinting that dependence on the government should become less over a period. There is limited time to improve the overall risk management processes, RBI Executive Director N S Vishwanathan said.

The government increased its recapitalisation commitment for PSBs this year to Rs 25k crore from the budgeted Rs 7,900 crore. It has also affirmed its commitment to allocate Rs 70k crore over the next three years to 27 state-run banks.

Banks need more capital. It's a question of raising it from the market in an environment where perhaps the pricing is not great, Vishwanathan said. He hinted that RBI is looking at revising its estimate on the overall requirement of capital for banks as they gear up for implementing the stricter Basel-III capital framework.

After the capital, liquidity is another important challenge for lenders as they gradually gear up for the new norms. RBI is "aware" of the need to reduce statutory liquidity ratio (SLR) which is the mandatory government bond holding for lenders.

The banking industry has flagged concern that the Basel-III requirements, especially those like liquidity coverage ratio (LCR), may hamper the availability of resources for credit.

Referring to India adapting the Basel-III framework, Vishwanathan said," there is a need for such framework, and a country like ours which is fast integrating with the world cannot have different regulations from others and it will also impact the perceptions."

Indian banks are going abroad and so also foreign lenders are coming into country. Any deviation from global standards could put Indian financial sector player at disadvantage overseas, he said.

Vishwanathan said there are some issues before the banks' demands can be met and there is a lot of work to do. Apart from capital and liquidity, he pointed out technology and skill development as other challenges for meeting the Basel-III requirements.

RBI prescription for state-owned banks

1. Use government infused capital for business growth
2. Upgrade risk management for prudent capital usage
3. Adpoting global practices important for overseas business
4. Focus on skill development to enhance competitive strength