The Centre is becoming increasingly tight-fisted when it comes to recapitalising public sector banks and other financial institutions promoted by it. This could impact credit growth.
A provision of ₹9,555 crore has been made for recapitalisation, among others, of public sector banks (PSBs), National Bank for Agriculture and Rural Development, Export-Import Bank of India (Exim Bank), India Infrastructure Finance Company Ltd, and Small IndustriesDevelopment Bank of India in FY2016.
Last year, a provision of ₹11,200 crore had been made for recapitalisation of the above mentioned entities.
However, due to fiscal constraints, the government will end up infusing only ₹6,990 crore in FY2015 into PSBs, including State Bank of India, Bank of Baroda, Punjab National Bank, Canara Bank and Syndicate Bank.
In order to improve the governance of PSBs, the Government has said it intends to set up an autonomous Bank Boards Bureau (BBB). According to the report of the PJ Nayak committee set up to review governance of boards of banks in India, a BBB comprising former senior bankers should advise on all board appointments, including those of Chairmen and Executive Directors.
The report had recommended that the Government distance itself from several bank governance functions which it presently discharges. Further, it suggested that a Bank Investment Company (BIC) be constituted to which the Government transfers its holdings in banks. The Government’s powers in relation to the governance of banks should also be transferred to BIC.
Jaitley said the Bureau will search and select the heads of PSBs and help them in developing differentiated strategies and capital raising plans through innovative financial methods and instruments. This would be an interim step towards establishing a holding and investment company for banks.
Allocation deferredAnanda Bhoumik, Senior Director - Banks & FI, India Ratings, said the decision on actual (capital) allocation to banks has been deferred to the to-be-set up Bank Board Bureau.
India Ratings had earlier estimated that the government will inject ₹20,000 crore in banks. The actual provision (of ₹9,555 crore) is a significant reduction and will impact credit growth.
“The speech (Budget) mentioned a differentiated capital contribution, suggesting that underperforming banks may lose out.
“Negative for growth prospects of mid-sized government banks that account for about 30 per cent of system assets. Prospects for private banks and NBFCs will likely improve instead,” said Bhoumik.