Money & Banking

Govt should draw up long-term capital infusion plan: Rangarajan

Our Bureau Mumbai | Updated on September 06, 2012

Futuristic: C. Rangarajan, Chairman, Prime Minister’s Economic Advisory Council at a conference in Mumbai on Thursday. — Shashi Ashiwal

‘Periodic entry of new players will keep country’s banking system competitive’

The Government should draw up a long-term programme for capital infusion in public sector banks. Otherwise, their market share will come down, cautioned C. Rangarajan, Chairman, Economic Advisory Council to the Prime Minister.

Capital is needed by banks to not only back up the loans they make but also implement Basel III guidelines.

Basel III guidelines are aimed at improving banks’ ability to absorb shocks arising from financial and economic stress by raising both the quality and quantity of the regulatory capital base.

To achieve full Basel implementation by March 31, 2018, the Reserve Bank of India has estimated that public sector banks (PSBs) will require common equity to the tune of Rs 1.4-1.5 lakh crore on top of internal accruals.

Further, PSBs will require Rs 2.65-2.75 lakh crore in the form of non-equity capital.

Major private sector banks will require common equity to the tune of Rs 20,000-25,000 crore on top of internal accruals. In addition, they will require Rs 50,000-60,000 crore in the form of non-equity capital.

Capital infusion by Govt

Rangarajan said “While several innovative suggestions have been made for raising capital, it is quite evident that the capital infusion by the Government (in PSBs) will remain large and has to be a continuous process.

Currently, public sector banks account for about 74 per cent each of aggregate deposits and credit in the banking system.

Rangarajan observed that the estimates for common equity (pegged at 1.4-1.5 lakh crore for PSBs and Rs 20,000-25,000 crore for private sector banks) may turn out to be an underestimate.

“While the private sector banks will have to meet their capital requirements by accessing capital markets, public sector banks will require additional budgetary support,” said Rangarajan at the FICCI-IBA banking summit.

Under the present dispensation, about 50 per cent of the additional capital requirement in the case of PSBs will have to come from the government, he added. Analysts say given that the government is facing twin deficits – fiscal and capital account, it may find it difficult to stump up resources to support PSBs.

New Banks

Rangarajan felt that there should be periodic entry of new banks if the Indian banking system is to remain competitive over time.

Pointing out that a closed system can only become oligopolistic ( a market condition where there are few sellers), the former RBI Governor said, the ‘threat’ of entry should not, therefore, be eliminated and the central bank should lay down entry norms as also decide on who satisfies the ‘fit and proper’ criterion.

“New banks take about two decades to achieve a sizeable level. Our decision on how many banks to be licensed must be based on what the economy will need not today but over the next several decades,” said Rangarajan.

Published on September 06, 2012

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