Capital requirement of Public Sector Banks

INVC,,

Delhi,,

The Cabinet today approved to provide an additional amount of Rs. 6000 crore, in addition to the Rs. 15000 crore already provided in the Budget 2010-11, to ensure Tier I CRAR (Capital to Risk Weighted Assets) of all Public Sector Banks (PSBs) at 7% and also to raise Government of India holding in all PSBs to 58%. It also approved that the exact amount, mode of capitalization and other terms and conditions would be decided in consultation with the banks at the time of infusion.

The proposed capital infusion would enhance the lending capacity of the PSBs to meet the credit requirement of the economy in order to maintain and accelerate the economic growth momentum.

This additional availability of capital is likely to benefit employment oriented sectors, especially agriculture, micro & small enterprises, export, entrepreneurs etc. in promotion of their economic activities which would, in turn, contribute substantially to the growth of the economy.

During the recent global financial crisis, the Public Sector Banks (PSBs) played a pivotal role in the economy by extending credit to all the productive sectors of the economy. The Government has always given ambitious targets to the PSBs ranging from credit disbursement, deposit mobilization, enhanced business and profitability indicators to financial inclusion. During 2008-09 the advances of PSBs increased by over 25% as against 10% by private sector banks and around 4% by foreign banks.

These banks, in this backdrop, would require capital commensurate with the increase in their Risk Weighted Assets (RWAs). Though the minimum regulatory requirement of Capital to Risk Weighted Assets (CRAR) for the banks is 9%, the Government has mandated a total CRAR of 12% with 8% Tier I Capital. Keeping, all other factors, the Finance Minister, in his Budget speech for the year 2010-11 announced that capital would be infused in the PSBs so that these are able to attain a minimum 8 percent Tier I Capital by 31st March, 2011 Subsequently, Union Cabinet too had approved a sum of Rs.15,000 crore in Tier I Capital Instruments of the PSBs for the year 2010-11.

There are many PSBs where the Government of India’s holding is close to 51%. This implies that in case of need, these banks cannot access the capital market for raising additional capital by dilution of Government holding. The present capitalization process of the PSBs has presented an opportunity to the Government to raise its shareholding in the PSBs, specially in those PSBs where the Government’s holding is close to 51%. This will enable the PSBs to raise additional capital from the market, in future, without depending upon the Government. An analysis shows that there are ten PSBs where the Government holding is less than 58%.