Rather than counting on the government for additional capital, banks need to grow their balance sheets by raising capital from the market, as keeping them adequately capitalised would be a challenge once the Basel II accord comes into force, according to K C Chakrabarty, deputy governor, Reserve Bank of India (RBI).
“The era of cheap capital is over. Investors are wary of the volatility of returns. Newer instruments and techniques would be required to attract investors. While the creation of enabling conditions for capital flow to the sector would continue to remain on the top of the reforms agenda, banks would need to grow their balance sheets by raising capital from the markets rather than count on government,” Chakrabarty said.
He added that balancing the interests of shareholders and depositors alike would be a challenge for banks.
Another key issue where banks might face challenges was meeting the funding requirements of the productive sectors of the economy, estimated to grow by nine per cent annually, Chakrabarty said.
“The debate over channeling a larger portion of available credit to the most productive sector or to those where the investment efficiency is lower is yet to be fully resolved. In any case, to make banks allocate increased credit to the productive sectors of the economy is strongly predicted on the bank’s capital strength. To do so, more capital infusion for banks will be required,” he said.
