The Finance Ministry has asked public sector banks to put in place a strategy for optimal utilisation of capital available with them. This will help in finalising the recapitalisation plan announced in this year’s Budget.
“Banks have been asked to review their investments in joint ventures, subsidiaries or wholly-owned subsidiaries, except trading investments. Besides this, recoveries against loss in assets (as on March 31, 2012) and profitability of fiscal year 2012-13 ( according to the memorandum of understanding) will also need to be reviewed,” a senior Finance Ministry official said.
Accordingly, each bank will prepare a plan for capital optimisation and assess its capital requirement. Once the plan is approved by bank boards, the Department of Financial Services will discuss it with bank managements between August 15 and 31. Subsequently, the Government will finalise the additional capital allocation, the official added.
In this year’s Budget, the Government has provided Rs 15,888 crore for recapitalsition during 2012-13, aimed at helping banks to meet the required capital adequacy norms under the current and Basel-III norms. The implementation of Basel-III will start from January 1, 2013 and end on March 31, 2018.
The Reserve Bank of India, in its circular dated May 2, 2012, prescribed that scheduled commercial banks (excluding local area banks and regional rural banks) need to maintain a minimum total capital (MTC) of nine per cent of total risk weighted assets (RWAs) against MTC of eight per cent of RWAs prescribed in Basel-III. Currently, banks in India have to maintain the capital adequacy ratio at nine per cent.
The official admitted that the implementation of the RBI’s capital regulation norms along with Basel-III creates a pressure on banks to have more equity capital. According to a rough estimate, banks might need a minimum of $30 billion as capital over the next six years to comply with the norms.
The Basel Committee on Banking Supervision issued Basel-III, a global regulatory framework for more resilient banks and banking systems in December 2010, aimed at improving the sector's ability to absorb shocks. This document was revised in June 2011.