Weak Banks to Get a Push from Finance Ministry

Published: 19th July 2015 04:52 AM  |   Last Updated: 19th July 2015 04:52 AM   |  A+A-

money

NEW DELHI: Weak banks are likely to get a push from the government as the finance ministry has decided to relax the efficiency parameters for capital infusion in these banks. The ministry has decided to pump around Rs 20,000 crore into state-owned banks to meet their capital adequacy needs.

“There are many banks that do not require any capital from the government this fiscal. We have thus decided to infuse funds, without being stringent on efficiency parameters, in the weak banks that require capital,” a senior finance ministry official said. He, however added, the ministry will not do away with efficiency-based capital allocation altogether.

 Earlier, the government used to issue capital as per two parameters. The first has been the bank’s return on equity (ROE) in the last financial year. Funds were pumped into those banks who had performed better than the average. The second parameter was return on assets (ROA), which illustrates how well the management is employing the company’s total assets to make profits. The higher the return, the better the management is in utilizing its assets base.

While presenting the Union Budget this year, Finance Minister Arun Jaitley had earmarked Rs 7,940 crore for capital infusion in 27 public sector banks (PSBs) for 2015-16. However, given the rising non-performing assets in the balance sheets of banks, the finance ministry has increased the budget to around Rs 20,000 crore.

“Banks with urgent requirements of capital, such as Syndicate Bank, Central Bank of India and Allahabad Bank, will be allocated first; the rest will be allocated by March 2016. The government will seek funds from supplementary demand of grants,” the official added.

Early last week, several PSBs made presentations on their capital requirements. Some, such as UCO Bank and United Bank of India, said they would  not require any capital for the current financial year, the ministry official said.   

As on March 31, 2015, the capital adequacy ratio (CAR) based on Basel III for State Bank of India stands at 12. For Bank of Baroda it is 12.6, for IDBI, it is 11.76. The CAR for United Bank for the same period is 13.28. (CAR is the measure of a bank’s financial strength expressed by the ratio of its capital, or net worth and subordinated debt, to its risk-weighted credit exposure, or loans.)

The Reserve Bank of India prescribes a minimum capital of 9 per cent of risk-weighted assets. That is higher than the internationally prescribed percentage of 8 per cent. Most Indian banks have a capital adequacy of over 12 per cent. The RBI has been telling the government to allocate more capital to banks as they need to clean up balance sheets and get capitalised enough to fund growth when it picks up.

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