New Delhi: India wants the banking regulator Reserve Bank of India (RBI) to start the process of issuing new bank licences without waiting for an amendment of banking rules, finance minister P. Chidambaram said after a meeting with the heads of state-controlled banks.
The minister also said the government is unlikely to infuse more than the budgeted Rs.15,000 crore into state-run banks in the fiscal to March. Many of these banks desperately need capital to fund loan growth.
The government is keen that RBI issue new banking licences but the regulator has been holding out for amendments that will give it powers to supersede bank boards’ and look into associate companies of the promoter group.
“We have written to RBI to finalize the guidelines for new banking licences and start the process of inviting applications. The whole process of issuing of bank licences will take at least six-eight months,” Chidambaram said. “By that time, we will amend the Act. The banking regulation Act will be amended in the winter or the budget session.”
He added that the powers the central bank wants are already there in other laws and in the RBI Act itself.
New banking licences were promised by then finance minister Pranab Mukherjee in his 2010 budget speech, but RBI has so far only issued two drafts for public discussion in two years. The second draft was put up for comments last August. In the meeting, the government assured state-run banks that the government will try to meet their capital requirements to support loan book growth. Though Chidambaram did not specify the total capital requirement of state-run banks, he said the government is finalizing the allocation for this fiscal and that the process will be completed in the next few weeks.
“I can’t infuse more than the budgeted amount. All banks will require additional capital. We are in the process of finalizing the allocations. All but one bank has tier-I capital of 8%,” he said.
Tier-I capital refers to a bank’s shareholder funds (or equity) less investments of certain kinds. The 8% tier-I capital is a requirement Indian banks have to meet by 2018, according to Basel-III norms. Basel-III is a global standard relating to the strength, solidity and safety of banks.
Bankers, however, said the budget provision is unlikely to fulfill the capital requirements of Indian banks in the light of rising provisioning for bad debts and wage revision and amortization of pension and gratuity.
“We have to make higher provision for NPAs (non-performing assets) and standard assets. Wage revisions have also to be accounted for in the third quarter,” said the chief of a public sector bank, who attended the meeting. “Also, amortization of pension benefits will have to be set off against equity from 1 January. Banks will require much more capital for all this,” said this banker who did not want to be identified.
Among state-controlled banks, Indian Overseas Bank, Central Bank of India and Bank of Maharashtra require the most capital. Of this, Central Bank of India’s tier-I capital is less than 8%.
“The budgeted amount may be sufficient for this year but banks will increasingly need more capital to meet Basel-III requirements. Over the next four-five years, the annual requirement could go up to Rs. 35,000 crore,” said Vaibhav Agarwal, an analyst at Angel Broking.
Chidambaram admitted that rising bad debts in banks were a concern and said the government will do some “handholding” to support stressed sectors. Companies in businesses such as infrastructure, steel, construction, textile food processing and telecom infrastructure are facing stress.
“NPAs (non performing assets) are a problem. They are a reflection of the slowdown in the economy. For all public sector banks, NPAs have increased by 0.98% from September 2011 to September 2012,” he said.
Rural development minister Jairam Ramesh, who also addressed chiefs of public sector banks, made a case for direct cash transfers for payments to beneficiaries under the Mahatma Gandhi National Rural Employment Guarantee Act. He asked cooperative banks to adopt core banking solutions rapidly and sought a faster roll-out of the business correspondent model. Business correspondents are essentially agents of banks who set up small branches that offer basic banking services.