“Cut your coat according to your cloth” seems to be the Finance Ministry’s message to public sector bank honchos.
It has asked them to do business according to their respective capital base. The ministry has also told PSU banks to consider the possibility of selling their non-core business. This development comes at a time when capital support from the Centre to public sector banks (PSBs) has been coming down over the last few years due to budgetary constraints.
A top PSB official said the ministry has told them to work out their capital raising plans, including tapping the equity and non-equity routes. By asking PSBs to consider selling non-core business, the ministry wants them to unlock their investments to mop up resources.
PSBs have non-core businesses such as mutual funds, investment banking, and insurance. Besides, they also have strategic investments, among others, in credit rating firms, stock exchanges, depositories, and primary dealership.
Capital infusion decreasing In 2012-13, to capitalise PSBs, the Centre had made a budgetary allocation of ₹14,588 crore (actual capital infusion was ₹12,517 crore); in 2013-14 the budget allocation was ₹14,000 crore and all of it was provided.
In the current financial year (2014-15), while the budget allocation was ₹11,200 crore, the Centre infused capital aggregating ₹6,990 crore in nine banks.
The capital infusion in FY2015 was based on new criteria – above average return on assets for the last three years and return on equity for the last financial year – whereby banks which are more efficient got rewarded with capital. This caught the banks, which were denied capital, by surprise.
PSBs that have not received capital infusion may go slow on corporate lending even if the tide in the economy turns favourable.
Instead, to conserve capital, these banks may prefer giving retail loans such as home loans and loans against gold and silver ornaments.
Retail loans are considered less risky than corporate loans and, consequently, require lesser capital to be set aside.
Capital infusion In 2015-16, the Centre has budgeted ₹7,940 crore as capital infusion for PSBs.
Banks require capital to grow their business as well as to meet the Basel III international regulatory norms. These norms require banks to maintain higher and better quality capital.
Basel III norms The RBI has assessed that PSBs will need as high a sum of ₹4.50 lakh crore in Tier 1 capital (which includes ₹2.40 lakh crore equity capital) to meet the Basel III norms.
The banker quoted above said that since the government is denying capital to PSBs that don’t meet the new efficiency parameters and giving it only in dribs and drabs to those who meet the parameters, it should be agreeable to the Centre if no dividend is declared for a couple of years.
The Centre’s shareholding in PSBs ranges from 58 per cent to 88 per cent.