The government will pump in Rs 11,200 crore in the next fiscal year into public sector banks as part of a recapitalisation exercise that involves cushioning the balance sheets of banks from bad loans and increasing their elbow room for expansion.
“In 2014-15, I propose to provide Rs 11,200 crore for capital infusion in public sector banks. They have opened 5,207 branches so far, against the target of 8,023 branches, and are near the goal of installing an ATM at every branch,” finance minister P Chidambaram said in his interim budget speech on Monday.
The minister told a news conference later that banks must also be in a position to set aside a part of their earnings to improve their financial condition and capital adequacy ratios. The ratio is a measure of banks’ health and measures capital needed as a share of its assets (loans) that are aggregated with risk weights. The Basel-based Bank of International Settlements prescribes it at a minim of 9%. The government wants Indian banks to maintain a minimum of 12%.
“Banking, unlike other industries, requires capital every year – and a significant part of their earnings must go in for this,” Chidambaram said.
Experts, however, said that the amount is insufficient. “The requirement is much more. Even to fuel a 5% economic growth, banks would require a much larger capital infusion,” said Ashvin Parekh managing partner of Ashvin Parekh Advisory Services.
The going has been tough for public sector banks that have seen non-performing assets – loans that do not fetch returns—surge 28.5% to R 2.36 lakh crore in September, 2013 from Rs 1.83 lakh crore in March 2013.
In his last budget, Chidambaram had earmarked Rs 14,000 crore for recapitalisation of public sector banks. Several banks including the State Bank of India, the country’s largest lender were recapitalised during the year. SBI alone got Rs 2,000 crore while Indian Overseas Bank received Rs 1,200 crore.
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