The Telegraph
Friday , June 27 , 2014
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RBI advice on bank cash course
Debt-equity mix to expand capital

Mumbai, June 26: The Reserve Bank of India (RBI) today asked banks to tap the capital markets to raise both equity and debt. Public sector banks will need a capital infusion of at least Rs 4.15 lakh crore over the next five years.

However, there should be limits on the PSU entities subscribing to the equity and debt issuances of each other, the RBI said in its Financial Stability Report, a bi-annual publication reflecting the assessment of the Financial Stability and Development Council.

According to the RBI, nationalised banks are expected to require an additional capital of around Rs 4.15 lakh crore to meet the Basel III requirements, of which equity capital will be Rs 1.43 lakh crore and non-equity capital around Rs 2.72 lakh crore.

The government’s contribution will be around Rs 90,000 crore at the existing level of its shareholding.

However, given the government’s fiscal constraints, the banks will also have to look at raising capital from other sources such as the equity and bond markets.

The report said the lenders’ ability to raise additional capital from the market would depend on the conditions of the capital markets and the “market perception” of their relative strengths and weaknesses.

“The time seems to be ripe for inducing banks, including public sector banks, to approach capital markets — both equity and debt, in a competitive environment. Beyond a minimum (regulatory limit) level of equity capital, there is a need to increase the role of other kinds of long term ‘hybrid’ and debt instruments,” the report said.

The RBI called for some curbs on the practice of subscribing to the equity and debt capital issuances of financial and non-financial companies by their public sector peers.

“This will restrict the extent of cross-holding of equity and debt within the public sector and help in the spreading of risks and ownership to a wider set of participants,” the report observed.

In his foreword, RBI governor Raghuram Rajan said the financial system remained stable, though public sector banks faced some major challenges, mainly in terms of asset quality and liquidity.

Macro stress tests show that the system level capital to risk-weighted assets ratio of banks remains well above the regulatory minimum even under adverse macroeconomic conditions, said the report.

Taking an optimistic note of the developments at the Centre, the report said improved political stability and expectations of a decisive and co-ordinated policy response would augur well for the economy and the markets.

“The formation of a stable government at the Centre has ameliorated political risk and has led to expectations of better policy co-ordination and implementation which has had a positive impact on the markets,” it said.

The report added that the growth-inflation dynamics had been adverse for seven of the past eight quarters with sub-5 per cent GDP growth and high retail inflation.