India’s banks face the challenge of raising significant resources to conform to global risk adequacy norms, but the statutory minimum government shareholding of 51 per cent could limit state-owned banks’ growth in the future, the Reserve Bank of India (RBI) said in a report.
“In the medium term, this (51 per cent government-shareholding) can become an issue hampering the growth of public sector banks if the government is not able to provide adequate capital for their expansion,” the RBI said in its 2006-08 currency and finance report.
While banks currently maintain capital much above the regulatory requirement, they would have to raise funds to the extent of Rs 5.7 lakh crore to comply with the full implementation of the Basel II framework.
The Basel II regulations, drafted by the Bank for International Settlements, mandate that banks have to maintain a minimum 12 per cent of their total assets for capital adequacy norms.
Banks with overseas branches have followed these requirements since March 31, 2008. Other banks will have to comply with the norms by March 2009.
“Banks have been maintaining capital at a level well above the capital regulatory requirements, which implies that the safety of Indian banking system has improved,” the RBI report said.
In the past, banks have met more than 85 per cent of capital requirements through internally generated resources. In addition, some public sector banks have headroom to raise capital from the market and dilute the Government shareholding to 51 per cent.
The report acknowledges the improvement in service delivery of public sector banks, but said there was a need to improve labour productivity. “Although overall efficiency and productivity of public sector banks improved, one area of concern is the low business per employee, which is almost one half of that of new private sector banks,” it said.
RBI also asked Indian banks to gear up to face the risks of fuller float of rupee, expected to happen by 2011.