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Public sector banks will not be starved of capital but they have to reduce their bad loans first, says Rajiv Takru, secretary (financial services) in the ministry of finance, in an interview with Vrishti Beniwal and Manojit Saha. Edited excerpts:
The interim Budget allocated about Rs 11,000 crore for capitalisation of public sector banks (PSBs). Will there be further allocation when the full Budget is presented?
We know the Basel-III norms and we have a fair idea of how much capital will be required. So, rather than making it very easy for banks to get capital, we have told them to recover as much as possible and make profits, which also leads to capitalisation. After that, the shareholders will pay whatever is required, and the government, as a shareholder, will also pay. There is no question of any PSB suffering on account of non-compliance with Basel-III norms.
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The finance ministry has also emphasised raising capital by other avenues such as qualified institutional placements. However, that doesn’t seem a viable proposition now, with some PSBs deciding to defer their plans. We had a very unfortunate situation during the State Bank of India (QIP). Turkey and Brazil had raised interest rates a day before the issue was launched.
As a result, funds promised and earmarked for investment here were suddenly diverted there. But that was unforeseen. A bank likes to conduct a QIP when the share price is better. So, all banks are waiting and watching.
Some banks are in talks with LIC (Life Insurance Corporation of India) for capital. What corpus should LIC have to support PSBs?
I think, so far, LIC has put in money in State Bank of India; I am not aware of any other bank approaching them. In any case,
LIC will gladly buy as funds are not an issue for it. Also, the banks’ shares are grossly undervalued.
Do you think the Reserve Bank of India (RBI)’s regulation and supervision should be tightened, so that an issue such as the one United Bank of India (UBI) faces can be avoided?
It should not have happened. As a matter of fact, we are engaged with RBI, checking to see why such a thing has happened. RBI has to react quickly to these problems. It has a nominee director who should have been wide awake.
However, we also must give RBI credit, as it does their annual financial audit. So, if in someone does badly in a particular month or quarter, the central bank’s scanner wouldn’t cover it. The moment it saw UBI in distress, it ordered a forensic audit.
Will there be a cap on new bank licences or will any entity fulfilling the fit-and-proper criteria be awarded a licence?
First, you have to see what the Jalan committee comes out with and how many people they find fit and proper. Second, the committee’s report will have to be seen by RBI to check whether that is proper or not. This is because after all, the responsibility is RBI’s.
I don’t think there will be a problem of plenty because actually, there is so much space in the market. It’s not that if you give 10 licences, the whole banking sector will collapse.
What are the concerns of the finance ministry with regard to India Post? The interim Budget didn’t allocate anything towards making it a bank.
The India Post issues haven’t really been approved, even by the investment board. The model is still being tinkered with. I suppose we will see something when it is organised.
Remember, a bank is not set up in a hurry. As far as we are concerned, India Post has been the brainchild of the postal department but we have been doing banking for years. We have some idea on how difficult it is to set up a bank. It’s not a passing fancy. A bank needs to have several functions in place such as risk management, credit and treasury.
The Nachiket Mor committee said globally, postal banks were a success.
In Switzerland, where I have seen things closely, in areas where there are postal banks, other banks aren’t there. I have not seen postal banks compete with any commercial bank. Sometimes, we start comparing apples with oranges.
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