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Public sector banks need capital infusion of Rs 10,000 crore a year if they were to grow their credit portfolio and also their market share.
"With credit growth between 15 and 20 per cent, then capital base also should be growing at 15-20 per cent," Dr C. Rangarajan, Chairman, Prime Minister’s Economic Advisory Council, said at the India Finance Conference 2011, organised by the Indian Institute of Management - Bangalore, and IIM – Calcutta, here on Wednesday.
"There is a need for the Government to continuously inject capital into PSU banks to the order of Rs 10,000 crore a year or more," he said. With credit portfolio of banks growing, there is a need for additional capital, some of which could be met through the banks’ internal resources.
According to him, the regulatory authority should keep a "constant watch on the trends of non-performing assets, which is key to maintaining the stability and soundness of the system". "NPA levels may go up in the near term, but it is important to maintain NPAs at lower levels in the medium term," said Dr Rangarajan.
He added that there was a proposal to prevent financial institutions, particularly banks, from growing beyond a certain size so that the dilemma of ‘too- big-to-fail’ can be avoided.
"Excessive risk taking and leveraging by banks need to be discouraged by appropriate regulatory measures or controls," he said. It was important that the financial system met the diversified needs of a growing economy like India, and for that, "we must encourage financial innovations," said Dr Rangarajan. There is the need to encourage a vibrant corporate debt market, which will not only help large industries but also small and medium enterprises.
He pointed out that ‘take-out financing’ has been suggested as one way by which the tenure of loan can be increased. "We need to draw appropriate lessons from the current international financial crisis." While too little regulation may encourage financial instability, "too much of it can impede financial innovations which are badly needed," he pointed out.
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