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The finance ministry has finally found merit in the PSU banks'plea for infusing more capital in them. It seems the central bank’s repeated reminders to the government on the issue have finally yielded some positive results.
“This is a strong case that the banks have made and therefore, I do believe that it's a case which merits the government seriously looking into it,” finance minister Arun Jaitley told reporters on 12th June after a meeting with bankers on capital infusion in public sector banks.
The Reserve Bank of India has been vocal that the government needs to put more capital in public sector banks this fiscal at a time when banks are cleaning up their balance sheet and preparing themselves adequately to fund growth when it returns. The government has allocated a paltry sum of Rs 8,000 odd crore for capital infusion in its banks this fiscal. Last year, the Narendra Modi-led BJP government allocated Rs 7000 crore though previous UPA government which demitted office in May provided for Rs 11,000 crore in its interim budget.
Now, after RBI as well as the banks repeatedly highlighted the importance of the issue, the government has had a change in heart.
This is not the first instance that the finance ministry has taken an U-turn. Earlier, the government decided to delay the process of forming a independent debt management office outside of RBI following central bank’s reservation. Similarly, the proposal to give Sebi the powers to regulate bond market was shelved for the time being.
In addition, on the Income Tax Returns form, two, the minimum alternate tax on foreign institutional investors, the government had to review its position.
The capital infusion in government banks is perhaps the most important issue which the government is now willing to take a closer look.
As many as 11 public sector bank’s capital adequacy ratio is below 11 per cent. While it is higher than the regulatory requirement of 9 per cent, but since banks have to make higher provision for bad loans – which is as high as Rs 3.1 lakh crore as on March 31, 2015 according to a study by rating agency ICRA – more capital will be required to set aside.
Higher capital will also be required to meet the Basel-III norms.
Public sector banks are constrained to raise capital from the market due to subdued valuations – most banks are trading at a discount to their book value. The government is also not willing to sell its stake – in some banks it is as high as 80 per cent – cheap. In such circumstances, capital infusion by the owner seems to be the only way out.
