There are two main issues facing the banking sector that the new government must address in its first Budget. One is the issue of providing sufficient funds to recapitalise public sector banks in the run-up to Basel-3 capital adequacy norms. The second issue is addressing the asset (loan) quality problems facing the sector.
The banking sector has a capital adequacy level of nearly 13 per cent which seems comfortable for now. But as the latest financial stability report of the Reserve Bank of India points out, in the event of a severe stress on asset quality, that ratio could fall to 10.6. Besides, there are individual banks who just about meet the minimum Tier-I capital adequacy of 8 per cent.
And total stressed assets (including restructured assets) have been over 10 per cent of advances. Bankers, while acknowledging the improved sentiment in recent days and expectation of GDP growth to about 5.4 per cent this fiscal, say there is still some pain left in the systemdue to exposure to infrastructure sector (power, telecom, roads, ports, aviation, and mining among others).
There has also been some effort by banks to sell their NPAs to asset reconstruction companies during the past year.
A further improvement in the financial health of banks is contingent on improvements in these sectors consequent to an economic pick-up as well as implementing pending reforms — particularly with regard to sectors such as coal, mining, oil and gas. Indian banks need about ₹5-lakh crore of capital spread over the next four years to meet the Basel-3 norms. About ₹3.2-lakh crore out of this will have to be equity capital and given the government’s stake in public sector banks, it will have to fork out something in the range of ₹1.5 to 1.8 lakh crore in the next four years.
The allocation that the earlier government made in the interim Budget was a measly ₹11,200 crore.
Finance ministry officials have made it clear that this sum is unlikely to be hiked this year. The government is betting on the fact that the markets are on the rebound and it can divest a bit of its stake in these banks and ask them to list some of their subsidiaries.
The government expects that banks will manage with their own resources, recover more money from stressed assets, and may not need much infusion this year.
Road map for future Perhaps one of the things the Finance Minister has to do is lay a road map and prepare the ground for allocating more funds for the next few years. Implementing some of the PJ Nayak committee recommendations can go some distance in helping the government reduce the outgo for such recapitalisation.
The committee had recommended that the government reduce its stake in public sector banks to less than 51 per cent without necessarily losing control.