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The need to conserve capital has prompted the Finance Minister to ask public sector bank chiefs to stick to the knitting (banking) and come out of all non-core activities.
Referring to the fact that the global crisis had revealed that banks should adhere to their core activities, the minister, at a meeting last month, underlined the need for PSBs to come out of all related activities.
Finance Minister P. Chidambaram told the PSB chiefs that banks should concentrate on core banking functions to improve their capital base.
Besides the core banking activity, many PSBs have diversified into ventures (non-core activities) such as mutual funds, life and non-life insurance, investment banking, equities broking, custodial services, pension, primary dealership, and information technology.
These non-banking entities require capital infusion from time to time for expansion of business. These entities could have a ripple effect on the balance-sheet of the parent bank should they tot up losses, said a banker versed with the developments.
Additional capital
As per Reserve Bank of India estimates, PSBs will be required to raise additional equity capital aggregating Rs 1.4-1.5-lakh crore under the Basel III regulatory framework, of which, the Government, to maintain its current shareholding, will have to pitch in with Rs 88,000-91,000 crore. The balance Rs 52,000-59,000 crore has to come from the market.
The Finance Minister’s observations on the importance of PSBs to come out of all related activities and focus on core banking functions assume significance in the context of the Government facing the challenge of a huge capital infusion. There are 26 PSBs, including five associate banks of the State Bank of India.
The Basel III regulatory framework has prescribed minimum capital requirements, capital conservation buffer, leverage ratio and dynamic provisioning for banks. Basel III will become effective from January 1, 2013, in a phased manner for Indian banks. It will be made fully applicable from March 31, 2018.
The objective of the framework is to improve the banking sector’s ability to absorb shocks arising from financial and economic stress and reduce the risk of spill-over from the financial sector to the real economy.
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