Govt. Defers Capital Infusion In PSBs

In his budgetary speech this year, the Finance Minister P Chidambaram had proposed to provide an amount of Rs 14000 crore to public sector banks, thus infusing capital to shore up their capital adequacy ratio. However, a leading financial daily has recently reported that the Finance Ministry has deferred this plan. With the kind of pressure on the economy and the proliferating expenditure caused by the announcement of recent populist measures, infusion of an amount of this quantum seems to be getting difficult.

Along with the increasing expenditure, this deferment can also be attributed to the inability of the government to raise funds. In the financial daily, the said official expressed the lack of resources with the government’s floundering divestment programme as a reason for the deferment.

In the Union Budget 2013-14, the government had a divestment target of Rs 40000 crore. So far, it has achieved all of Rs 1325.27 crore through divestment. With the programme way behind target, the pressure is bound to build up. But do these banks really need such government aid?

The government is seeking to ensure that public sector banks meet the Basel III regulations as they come into force. Gradually, the ratios would be implemented and would be fully in place as of March 31, 2018. To adhere to these norms, the government infused Rs 20117 crore in 2010-11 and Rs 12000 crore in 2011-12.

Currently, the required capital adequacy ratio stands at 6% below the norms prescribed by the RBI. This would go up by 50 basis points to 6.50% by March 2014. The Finance Ministry planned to infuse those banks with capital that have the required ratio below 8%. The current status of these banks is well above the required limit, and this gives the government some time to act on the situation.

However, one of Raghuram Rajan’s comments makes for an arguable point. He had said, “I see little evidence that state ownership helps significantly in achieving public aims such as greater inclusion. It makes sense to rethink the state presence in the financial sector.”

With financial inclusion as the larger aim of the government and the RBI (and considering the basic assumption of continual pressure on the economy on account of populist measures), does it make more sense for the government to ask banks to consider alternative ways to raise capital rather than copious amounts of capital infusion year after year?