The Reserve Bank of India on Thursday said that the growth of the 20 public sector banks could be affected due as the government holds a majority stake in these banks.
In the Report on Currency & Finance, the report released by the apex bank on Thursday, the regulator estimated that over the next five years, banks would need Rs 5,70,000 crore to finance their expansion. Of this, public sector banks would account for nearly two-thirds, or Rs 3,70,000 crore , of the capital needed.
The statement comes at a time when public sector banks, which account for more than 70 per cent of the business, have sought a relaxation on the 51 per cent floor on government holding. Five years ago, a Bill to amend the law that mandated majority government control was not passed by Parliament.
The Manmohan Singh government had at the start of its term said that it did not intend to alter the public sector character of these banks and there has been no change in its stance. Realising that the banks are facing problems in raising funds without diluting government holding, the Centre and RBI allowed them to issue hybrid instruments and preference shares.
While RBI came out with an unexpected position on public sector banks, it did not surprise foreign banks by indicating that it would prefer a gradual opening up after carefully weighing in concerns on concentration due to consolidation, potential conflict of interest and higher chances of contagion effects. The regulator is already expecting acceleration in the consolidation process.
In addition, it said that the foreign banks, which had a lower cost of funds, were not passing on the benefit to borrowers and that was showing in the high net interest margins.
At the same time, it warned of the possible pressure on net interest margins due to increased competition and exhorted banks to stay away from excessive dependence on borrowings and instead focus on deposit mobilisation.
While maintaining that regulation of financial conglomerates posed a challenge for the regulators, RBI made a special mention of the growing use of e-finance products saying they posed certain risks for banks and required specific safeguards. Further, it called upon banks to improve their operational efficiencies as the cost of intermediation remained high in the country.
RBI, which has been flagging the risk of higher delinquency rates on retail assets in the recent past, cautioned banks on the potential asset-liability mismatch due to increased exposure to the infrastructure sector. It suggested that the long-tenure loans could be transferred to the balance sheet of other financial players.
