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Business News/ Opinion / Online-views/  Recapitalizing India’s banks
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Recapitalizing India’s banks

The country should allow public sector banks to approach the capital market and raise the money needed.

Illustration: Jayachandran/MintPremium
Illustration: Jayachandran/Mint

Challenges often bring about opportunities. Indian banks will need to raise 1.5-1.75 trillion till 2018 to comply with the capital adequacy requirements under the Basel III norms. Reserve Bank of India governor D. Subbarao has said this quite clearly. Since public sector banks (PSBs) control about 75% of the banking assets in the country, they will have to raise bulk of the capital.

And this poses a number of challenges.

At the moment, government finances are under serious strain and it is highly unlikely that the government will be able to spare the large sums of cash for adequate capitalization of banks. As a result, either banks will not be sufficiently capitalized and will suffer on growth or the government will have to increase its borrowings substantially and then capitalize these banks. In any case, borrowing and making equity investments is a losing proposition. Illustratively, if the government decides to borrow today, it will have to cough up over 8% (cost of borrowing) and will earn less than 4% (dividend yield for PSBs) on its investment. The difference will be a recurring net loss and will impose an unnecessary burden on taxpayers.

The more prudent way will be to allow PSBs to approach the capital market and raise the money needed. If anything, the process should be speeded. First, the government will not have to strain its finances to make equity investments. Second, as the government shareholding goes down over time and public shareholding increases, it will usher greater transparency and will give freedom to the management in operational issues, resulting in increased efficiency and productivity. Investor confidence will, however, require a substantial dilution of government ownership and not merely what is required to raise a sufficient amount of money. A lower government stake will also restrict ambitious civil servants in the finance ministry from interfering into the day-to-day business of the banks and its board.

While this may be the right approach, under the conditions that prevail in the government, it may be asking for too much. Any loss of ownership and control is likely to face opposition both inside and outside the government. But if government-owned banks are to meet this regulatory challenge, sooner or later, the government will need to overcome this resistance to change or else banks, taxpayers and the economy at large will continue to be locked in a suboptimal situation.

Should public sectors banks be allowed to raise capital on their own? Tell us at views@livemint.com

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Published: 13 Aug 2012, 05:06 PM IST
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