Public Sector Banks have to be strengthened by capitalisation, says C Rangarajan.

The government has to take decisive measures to strengthen the PSBs says C Rangarajan. The banking sector is facing two important events at present. The first is the Basel II requirements. Secondly the banks are going through the phase of consolidation and competition. These two necessitates infusion of grater funds. Hence to retain the statusquo, each bank has to get more capital. For the public sector banks, the government has to take measures to infuse more capital. Hence the government should either capitalise public sector banks (PSBs) or allow its stake to fall below 51 % if PSBs are to maintain the cur­rent growth.

Mr Rangarajan was delivering the inaugural lecture at a FICCI-IBA seminar in Mumbai. “The government will have to make up its mind either to bring in additional capital or move towards reducing its share from 51% through appropriate statutory changes.” At present, the policy of the government is that its share in PSBs cannot go below 51%.  With the new capital norms expected to be in place for Indian banks by2009, capital requirements of most PSBs are expected to grow. Besides, their assets will grow or will have to grow in tandem with the pace of growth in manufac­turing and services sectors.

“Public sector banks’ ability to meet the growing capital needs will be inhibited, unless the government is will­ing to bring in more capital,” said Mr Rangarajan. In the drive to meet greater funds, tier-I capital that is equity, is very important according to the former governor of the RBI.

 “While this constraint may not be binding immediately, it will be, sooner or later. If the growth is modest, retained earnings may form an adequate source of supply. However, when the growth is rapid which is most likely to be the case, there is a need for injection of equity, enlarging the shareholding”.

 Mr Rangarajan said that consolidation in the sector is likely to gain momentum in the near future. “As the bottom-lines of domestic banks come under increasing pres­sure and the options for organic growth exhaust them­selves, Indian banks will need to explore ways for inor­ganic expansion. This, in turn, is likely to unleash the forces of consolidation in Indian banking,” he said