The Telegraph
Monday , May 26 , 2014
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Bank funding poser for new govt

Mumbai, May 25: The new government needs to finds ways to meet the massive funds requirement of PSU banks.

Nationalised banks will require at least Rs 2 lakh crore (Rs 2 trillion) over the next 4-5 years to meet the Basel III requirements and fund their asset growth.

The onus will be on the government, which is the majority shareholder in public sector banks, to support them either by partially funding these needs, or creating an environment that enable these lenders to raise funds.

Estimates vary on the fund required by domestic banks to meet the Basel III norms, which focus on improving the banking sector’s ability to face shocks created by financial and economic stress by increasing the level and quality of capital deployed. The RBI wants the norms to be fully implemented by March 31, 2019.

Rating agency Crisil estimates the aggregate tier 1 capital (core capital) requirement of banks at around Rs 2.3 lakh crore up to March 31, 2018.

Recently, a committee headed by former Axis Bank chairman P.J Nayak, forecast that public sector banks will need at least Rs 2.10 lakh crore over the next four years. Even if the government contributed 60 per cent of this, it will have to invest at least Rs 1.26 lakh crore.

“The government could find it difficult to invest such an amount as it could adversely impact the fiscal deficit. Therefore, it will have to facilitate fund raising by banks. This can be done by taking measures that include the development of bond markets,” a senior official with a public sector bank, who does not wish to be quoted, said.

Development of bond markets will be necessary as banks will have to raise at least Rs 1.4 trillion during this period through the non-equity route, says Ramraj Pai, president of Crisil Ratings. According to analysts, banks may face difficulties on the equity front as well.

Banks will have to raise funds at good valuations and this could be challenging because of the bad asset problem that lenders are facing now, Vaibhav Agrawal, vice-president of research (banking) of Angel Broking, told The Telegraph.

The government may also weigh the recommendations of the Nayak committee, which suggested the Centre trim its holdings in PSU banks to below 50 per cent.