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According to the report, 2018-19 marked a turnaround taking shape in the financial performance of India’s commercial banking sector. (Photo: Mint)
According to the report, 2018-19 marked a turnaround taking shape in the financial performance of India’s commercial banking sector. (Photo: Mint)

Public sector banks should not over-rely on government for capital, says RBI

  • RBI said that PSBs led the recovery in capital ratios for the banking sector in 2018-19
  • Private banks and foreign banks remained well-capitalised and above the regulatory minimum of 10.875% in March 2019

Mumbai: In the coming years, the financial health of public sector banks (PSBs) should increasingly be assessed by their ability to access capital markets instead of the tendency to depend excessively on the government, said the Reserve Bank of India (RBI) in a report on Tuesday.

In its Report on Trend and Progress of Banking in India, the central bank said that the government has been infusing capital in some PSBs, just enough to meet the regulatory minimum including capital conservation buffer (CCB).

That apart, the deferment of the implementation of the last tranche of CCB till 31 March, 2020 has offered some breathing space to these banks, said RBI.

“Going forward, the financial health of PSBs should increasingly be assessed by their ability to access capital markets rather than looking at the government as a recapitaliser of the first and last resort," the central bank said.

RBI said that PSBs led the recovery in capital ratios for the banking sector in 2018-19. They were recapitalised with 90,000 crore in FY18 and another 1.06 trillion was infused into these banks in FY19. This bolstered their capital position, even as they battled with the overhang of impaired assets.

Private banks (PVBs) and foreign banks (FBs) remained well-capitalised and above the regulatory minimum of 10.875% in March 2019. However, private banks former experienced a marginal decline in capital adequacy ratio in 2018-19 after the reclassification of IDBI Bank as a private bank.

RBI said that the capacity of public sector banks to sustain credit growth in consonance with the financing requirements of the economy will, however, require that capital is maintained well above the regulatory minimum. Therefore, recapitalization, RBI said, would be a continuous process. The regulator however acknowledged that raising resources through public issues or private placements has been constrained, partly due to volatile market conditions.

According to the report, 2018-19 marked a turnaround taking shape in the financial performance of India’s commercial banking sector.

“After seven years of deterioration, the overhang of stressed assets declined and fresh slippages were arrested. With the concomitant reduction in provisioning requirements, bottom lines improved modestly after prolonged stress and the banking sector returned to profitability after a gap of two years in the first half of FY20," it said. In 2018-19, RBI said, the consolidated balance sheet of commercial banks expanded at an accelerated pace for the first time since 2010-11, buoyed by a pickup in deposits on the liabilities side and loans and advances on the assets side.

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