Government has unveiled its timetable to capitalize Public Sector Banks to meet the Basel III standards. In the next four years, the Government, as the majority share holder in PSBs, will put Rs 70000 crores in different phases.
The first installment of Rs 25000 crore will be made in this fiscal year itself. Second installment in the same size will be made in 2016-17. In the third and fourth years, Rs 10000 crores each will be provided to the PSBs.
The PSBs are facing some weak trends especially rising NPAs (Non Performing Assets). Gross NPAs of the PSBs are higher than any other commercial bank group like private banks and foreign banks operating in the country.
This has compelled the RBI to tighten other regulatory norms like provisioning norms and asset securitization norms to keep them stable and healthy. Governor Raghuram Rajan was insisting the Ministry of Finance about strengthening the PSBs by providing additional money.
Globally, banking industry has turned into a loss and uninteresting sector with many central banks and governments imposing strict regulations and introducing capital enhancement norms. The trend is the result of the financial crisis of 2007.
A major initiative on this is the new advanced Basel III norms designed by the Basel Committee.
In India, the RBI is following a more stringent Basel III standard with the minimum capital proposed for banks is 9 per cent by 2019 compared to 8% by the Basel committee. Adoption of Basel III standards will be completed in India by end March 2019.
Capital adequacy ratio is the amount of share capital with a bank as a percentage of its assets (loans given and investment made).
Most important part of this capital requirement is the common equity contribution of 5.5 % by the owners. Including this equity contribution, the Basel norms adopted by the RBI aims to raise the Tier I contribution to 7%. For the PSBs, the government’s policy is to maintain at least 51% share. This means that to retain the majority share holding, government has to inject large volume of money into the PSBs.