The 14th Finance Commission has recommended setting up of a dedicated committee for the financial sector to prepare the framework for financial support to domestic financial institutions (DFIs) such as public sector banks.

 

“We recommend that a Financial Sector Public Enterprises Committee be appointed to examine and recommend parameters for appropriate future fiscal support to financial sector public enterprises, recognising the regulatory needs, the multiplicity of units in each activity, and the performance and functioning of the DFIs,” the Commission said in its report.

 

Public sector banks have a dominant role in the entire DFI framework. This suggestion has come at a time when these banks need around Rs 2.84 lakh crore additional capital to meet the BASEL-III requirement. These requirements are critical to make banks healthy with growing business. At present, there are 27 public sector banks. These are divided into — nationalised banks (21) and State Bank of India group (6).

 

There are a number of ways for providing additional capital such as budgetary support and raising money by selling equities. For the current fiscal i.e. 2014-15, Finance Ministry has infused Rs 6,990 crore in nine banks from the budgetary provision of Rs 11,200 crore. At the same time, the Government has decided to dilute its holding in public sector banks up to 52 per cent in a phased manner. At the current price, this can give over Rs 1.61 lakh crore.

 

The Commission noted that even after raising money through dilution, the Government contribution of Rs 1.02 lakh crore will be required during the period 2015-16 to 2019-20. “We also understand that there is a proposal to create a holding company, but we believe that such a mechanism will result in indirect and non-transparent fiscal obligations for the Union Government. In our view, there is scope and need to further lower the fiscal costs of re-capitalisation by restricting it to select and better performing public sector banks, instead of an across-the-board policy of covering all of them, in view of the competing demands on available budgetary resources.” It said.

 

In fact, on February 7, the Finance Ministry announced adopting efficiency parameters to give more capital to banks. It was made clear that more efficient would only be rewarded with extra capital for their equity so that they can further strengthen their position. Earlier, capital used to be given to those banks whose equity erosion has taken place. 

 

Supporting the change, the commission said non-performing public sector banks might be advised to manage their asset portfolio and growth in tune with the available capital. This will promote competitiveness amongst these banks and act as a hard Budget constraint on them. “This approach requires a view to be taken on, as well as an assessment of, the number of public sector banks that can cater to the desirable share of the public sector banking system in India in order to serve the social objectives,” it said.

 

Basel-III capital adequacy norms will be fully phased in and applicable by March 31, 2019. Capital requirements of banks have increased under Basel-Ill. According to these norms, the minimum Tier-1 has to be 7 per cent. In addition, banks require another 2.5 per cent of common equity as capital conservation buffer. In all, banks need a total of 9.5 per cent.

 

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