The new reality for the Public Sector banks By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

March 31, 2015 | Posted by bobbysrinivasan << back to blog

This is conversation between a student and his professor on the future of public sector banks.

Student: Prof., I am reading a report which states that the government has granted seven public sector banks to raise capital through equity issue in the market to meet their equity adequacy requirements.

Prof.: Yes. The govt. wants the public sector banks to have adequate equity to meet the Basel III requirements which are much stricter than the Basel II. But bear in mind that the government will continue to be a major stakeholder with 52 percent of the equity owned by them.

Student: What is the government doing about it?

Prof.: The government has been putting money since 2000 into the bank equity as a process of recapitalization. As per the data available between FY 2000 – 2001 and FY 2013 – 2014 the government had contributed 81,200 crore rupees for this purpose.

Student: What are Basel III requirements and where will the government find the money?

Prof.: According to some estimates available, Public Sector Banks will require 2,40,000 crore rupees by 2018 to meet the requirements. This will mean that the government ownership will have to come down significantly from the required 52 percent.

Student: The amount of money required looks so big. It appears to me that this is likely to be a big challenge to raise this amounts of capital.

Prof.: I agree with you and it will be quite a challenge to raise this kind of money. This may be possible because

The Indian economy is growing around 7 percent and this will require more money with the bank to facilitate credit expansion.
It is assumed that India would implement the stricter Basel III norms (including setting aside capital as conservation and countercyclical buffers) and keep to the deadline of 2019.
This is a scary hypothesis but will say it anyway. The restructured and non-performing assets have been increasing steadily. According to some estimates the non-performing assets of PSU banks exceed 10 percent of all deposits. Given that it has to be written off in some future points in time, I presume that more capital will be required to meet the Basel III requirements.

Finally, we pride ourselves about our highly regulated banking system and that our banks have conservative lending policy. The reality is far from truth. Our PSU banks have been struck with infrastructure loans which are not going to be completed for want of funds and at the same time they all will become non-performing assets. So recapitalization will mean privatization of public banks. This in fact is the reality. If it does not take place, the unorganized sector of the economy will keep expanding making it more challenging for the government to keep a complete track of the economy.

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