The finance ministry will shortly move the cabinet for a cash infusion programme of nearly Rs 4,50,000 crore spread over a 10-year period to bolster the capital base of public sector banks.
The ambitious move comes in the wake of a downgrade of the State Bank of India (SBI), the country’s biggest lender, by global ratings firm Moody’s, which blamed the pull-down on an inadequacy of capital in SBI to cushion bad loans or contingencies and a “weakening asset quality” – a reference to loans that do not yield interest.
The government will infuse more capital in state-owned banks and financial institutions (FIs) to ensure that their capital reserves do not remain uncomfortably close to the minimum stipulated levels over a longer period of time.A panel headed by economic affairs secretary R Gopalan has held a series of meetings with senior officials and bank executives to discuss a framework to keep banks’ and FI’s capital muscle strong over a long term.
“We want to inject capital to a few banks on an immediate basis while the quantum of Rs 4,50,000 crore would be over a period of time keeping in mind the requirements of government banks and financial institutions,” a senior finance ministry official told Hindustan Times.
The Gopalan committee would also look into the possible methods of capital infusion into these FIs and banks, ministry sources said. The committee is yet to decide on the methods and is expected to shortly submit its report that would recommend an array of options.
In the current fiscal year itself, the government plans to infuse Rs 20,000 crore into various banks, including SBI.
An official who did not wish to be identified said that the latest capital support is aimed at strengthening the tier I capital of the banks. As per regulatory requirements, banks are required to maintain a minimum of 8% of total capital as tier-I capital, which broadly refers to shareholder equity.
“Adequate capital will be provided to all public sector banks,” the official said.
Finance minister Pranab Mukherjee said recently that the government would take steps to ensure that all banks are recapitalised and are in a position to meet the surging credit demands expected in the future to fuel growth in the economy.