Arun Jaitley hints at higher capital infusion for banks
2 min read 12 Jun 2015, 02:50 PM ISTFinance minister says banks have made a strong case for more capital, adds they could offer more rate cuts in coming weeks
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New Delhi: Finance minister Arun Jaitley on Friday hinted at a higher capital infusion in state-run banks even as the government pushed the banks to pass on the benefits of rate cuts by the central bank to consumers.
“Banks have made a strong case for more capital. It merits seriously looking into by the government," Jaitley said at the press conference after meeting the heads of banks and financial institutions.
He, however, declined to comment on whether the capital infusion will be based on efficiency or whether all banks will get a share from the overall pool. He also did not disclose the quantum of the additional infusion being considered.
In the budget, the government had made a provision of ₹ 7,940 crore for capitalizing state-run banks for this fiscal, but it was considered inadequate to meet the capital requirements of the 20-plus state-run banks, especially given that the government infused only ₹ 6,990 crore in the nine state-run banks in 2014-15 based on efficiency parameters. The Reserve Bank of India (RBI) had also termed the allocation inadequate.
The finance ministry has allowed state-run banks to bring down the government’s stake to 52%. But adverse market conditions as well as unfavourable valuations, given their high levels of bad debt, have made it difficult for banks to raise funds.
Banks have been asked to make presentations to the government over the next few weeks on their capital requirements and the avenues they are exploring to raise capital, including selling off non-core businesses.
State-run banks are estimated to require ₹ 10,000-20,000 crore of equity capital and ₹ 30,000-40,000 crore of additional tier-I capital in this fiscal, said Vibha Batra, senior vice-president at rating agency Icra Ltd.
“So far, additional tier-I issuances have not been successful. With the credit profile varying across banks, smaller banks may find it difficult to raise additional tier-I capital. Even larger banks may have to pay a higher coupon rate to raise funds," she said.
“If the government infuses more funds, it will provide a cushion to the balance sheet of banks in these difficult times," she added.
In the meeting, banks also explained the constraints faced by them in cutting rates after the government expressed unhappiness over the pace of rate cut transmission by banks. They flagged the high interest rates of 8.5-9% on small saving schemes that are making it difficult for banks to cut interest rates.
“Some part of it (rate cut) has been passed on to customers, while some banks have not passed on the benefits. Some of the banks felt that over the next few weeks, they will be in a position to work out greater cuts," Jaitley said.
Since January, RBI has cumulatively cut rates by 75 basis points but banks have not passed these on to customers, with most of them reducing base rates by less than 25 basis points. One basis point is one-hundredth of a percentage point.
On non-performing assets (NPAs) of banks, Jaitley said NPAs have come down to 5.2% in the March quarter from a peak of 5.64% but it is too early to indicate a trend. “Banks are of the view that it will take them 2-3 quarters to reach a somewhat greater comfort level (with regard to NPAs)," Jaitley said, adding that an improvement in the economy and the higher public spending by the government will help in improving the bad debt situation of banks.
For kick-starting stalled projects, especially those stalled on account of financing, the finance ministry has decided to hold a meeting with stakeholders, including state governments, concerned departments and banks, to resolve the issues.
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