Govt mulls new ways to raise capital for banks

The Finance Ministry and the Reserve Bank of India will discuss new ways of raising capital for banks on March 7. Finance Minister P Chidambaram also sees non-performing assets at the end of 2013-14 to be higher than in the previous year, which was 3.84 per cent of total advances.

“Bankers have given various suggestions for raising Tier-1 capital. These suggestions include investment by pension funds and insurance companies, rights issue for minority shareholders at the time of capital infusion by the Government and issuance of shares to employees,” Chidambaram told newspersons after a three-hour meeting with bankers here.

Capital requirement It is estimated that banks need around ₹1-lakh crore capital in the next few years to meet business needs. Capital of a bank is mainly divided into two categories, Tier 1 and Tier 2. Tier 1 is the core capital and it includes equity and declared reserves, while Tier 2 capital refers to revaluation reserves, undisclosed reserves, hybrid instruments and subordinated term debt.

Financial Services Secretary Rajiv Takru told

Business Line that pension and insurance money will flow intoTier-1 capital not as equity, but as bonds. It could be through various debt instruments, including perpetual bonds. Simply put, insurance and pension money will bolster the capital of banks through perpetual bonds issued by them.

The Pension Fund Regulatory and Development Authority has already allowed parking of pension money into bank capital as perpetual bonds. The insurance regulator will soon take a call on this matter. The IRDA board is likely to meet on March 10.

The Government has proposed to infuse ₹11,200-crore capital into banks in 2014-15 as against ₹14,000 crore in 2013-14. But Chidambaram said keeping in mind RBI regulations of bank’s CRAR (capital to risk assets ratio) of one per cent over and above Basel-III norms, more capital is required. That is why newer methods to mop up capital are being thought of.

Now, with the expansion of business and implementation of Basel-III norms, banks need more capital. The easy option is to offload shares in the market and mobilise money. But there is one problem. Rules say that Government’s equity in State Bank of India, its associates and nationalised banks should not go below 51 per cent. However, in practice, the effort is to keep minimum Government’s shareholding at 55 per cent. As a result, many banks have limited room to sell shares to the general public.

Non-performing assets Terming NPAs as the biggest challenge facing public sector banks, the Finance Minister asked them to focus on recovery of bad loans, improving the asset quality and better credit appraisal.

He confessed that NPAs are high among large corporate accounts and small industries while they have fallen for the real estate segment. NPAs or bad loans of public sector banks rose 28.5 per cent from ₹1.83-lakh crore in March 2013 to ₹2.36-lakh crore in September last year.

He mentioned that banks have managed to recover ₹18,933 crore during April-December while accounts worth around ₹22,000 crore have been upgraded, which means the NPA threat has faded.