Time not apt for performance-linked capital infusion in govt banks: RBI

The Finance Mnistry recently allocated Rs 6,990 cr in nine public sector banks based on their efficiency

The Reserve Bank of India (RBI) has disapproved of the government’s recent decision to infuse capital in public sector banks (PSBs) selectively, saying the timing of this was inappropriate.

Recently, the finance ministry had allocated Rs 6,990 crore in nine PSBs, based on efficiency.

“To my mind, at this point of time, to restrict allocation only to a few banks and to leave the others out...the time might not be very appropriate…that is what I feel,” RBI Deputy Governor S S Mundra said on the sidelines of an event here. “To deprive them (the others) of capital at this point, I think, will only aggravate the problem and have implications on growth...A few challenges that they face at this point can be managed if they are able to maintain growth momentum,” he added.

Selective allocation of capital would only “aggravate” the problems PSBs faced, he said.

PSBs have seen their capital being depleted due to rise in stressed assets, which calls for higher provisioning. Their capital requirement will rise further, owing to the requirement to comply with Basel-III norms. According to RBI data, between March and September 2014, stressed advances in the banking system increased from 10 per cent of total advances to 10.7 per cent.

“As we move towards the Basel-III framework, maybe in a year or two, the requirement will keep on increasing and there will be enhanced capital requirements,” Mundra said.

He added earlier, RBI had estimated capital requirement of Rs 2.40 lakh-crore for PSBs, factoring in 15 per cent growth in risk-weighted assets till FY19, by when migration to Basel-III has to be completed. However, with expectations of faster growth, credit growth will be 16-17 per cent, he said.

“If we are talking about growth picking up momentum and if FY16 growth is 6.5 per cent, even by old GDP (gross domestic product) data, that would translate into credit growth of 16-17 per cent,” he said, adding as of now, banks were adequately capitalised.

For selecting banks for capital infusion, two parameters were taken into account: Weighted average of return on assets for all PSBs for the past three years (those above the average were considered); and the return on equity for the past financial year.

“Those who have performed better than average have been rewarded,” the finance ministry said in a statement earlier this month.

Mundra said given banks’ higher requirement of capital, the current rate of allocations by the government might not be sufficient. “Looking at the current requirement, the allocation of Rs 10,000-12,000 crore might not be good enough. It has to much more,” he said, two days ahead of the presentation of the Union Budget, in which the government spells out capital infusions.

To meet the higher capital requirements, RBI had recommended three alternative mechanisms to the government, Mundra said. A committee headed by former Axis Bank chairman PJ Nayak, set up to review governance issues in PSBs, has suggested the government cut its stake in these banks to less than 51 per cent, which will give headroom for banks to raise capital.