Monday, November 11, 2013

PM's council wants govt to cut stake in banks to 51%

The Prime Minister's Economic Advisory Council has recommended phased dilution of government stake in public-sector banks, from 58 per cent to 51 per cent, and introduction of on-tap licensing of new banks.

In a note prepared last week, the council, headed by C Rangarajan, said the stake reduction would help raise the additional capital required to implement the Basel III norms, meant to strengthen the banking system. Assuming no discount to market price, the government will be able to raise more than Rs 55,000 crore, the council has estimated, adding the pricing of shares should be attractive enough to bring in non-government shareholders.

Making a strong case for abolishing the present system of "stop-go" licensing of new banks, the council has said it should be an ongoing process, in which licences can be given whenever the central bank feels an applicant meets the strict eligibility criteria. Apart from deepening the banking system, this will help reduce the fiscal impact of Basel III as the public-sector banks' share in incremental credit creation can be brought down from the current 70 per cent. This can be done if private banks fill in the space vacated by their public-sector counterparts, the council has said.

In his maiden press conference as Reserve Bank of India Governor, Raghuram Rajan had also favoured the process suggested by the council.

The council has also recommended that measures be taken for quicker resolution of non-performing assets. As the Companies Bill, 2013 has been enacted, there should not be any delay in setting up of the National Company Law Tribunal and a time-bound mechanism for dealing with NPAs. Further, the government has liberalised the foreign direct investment (FDI) policy for entry of asset-reconstruction companies and investments in security receipts of ARCs. It has asked RBI India to urgently consider steps to ensure the policy framework is implemented. RBI has also been asked to reconsider whether the requirement of additional one per cent Common Equity over Basel III in its guidelines is necessary. Likewise, the leverage ratio of 2.5, against the lower Basel-III requirement of 3, should be reviewed.

Basel III norms are voluntary regulatory standards to strengthen banking regulation, improve supervision and reduce risks in the system. They were scheduled to be introduced from 2013 until 2015; however, the implementation deadline has been subsequently extended to March 31, 2018.

On the basis of three separate estimates (by committees of the finance ministry, RBI and that under SBI chairman) the council concluded in February at least Rs 6 lakh crore would need to be raised from the government and the market for full compliance with the guidelines. Of this, Rs 1.55 lakh crore would have to be contributed by the government in terms of equity capital up to 2018 as Tier-I capital, while non-governmental shareholders would have to put in Rs 1 lakh crore in equity. Public-sector banks would also need to access the markets for placing non-common equity instruments of Rs 3 lakh crore for Tier-I and -II capital. And, private banks would have to mobilise up to Rs 70,000 crore from the market to be Basel-III-compliant.

However, the council says, based on varying growth in risk-weighted assets of public-sector banks (18 per cent instead of the 20 per cent that was the basis for the earlier calculation after growth decelerated), and a higher NPA - gross NPAs to gross advances rose to 3.42 per cent as of March-end, compared with 2.94 per cent at the end of March 2012 - the total money needed could go up to Rs 7,12,759 crore or Rs 7,37,543 crore, based on the different parameters.

In its recommendation, the council has also pointed out that the extant SLR levels in India are a major risk-mitigating factor outside Basel III - RBI can use this as a bargaining tool to negotiate a protracted phasing of Tier-II requirements. It has also suggested that urgent steps be taken to improve the efficiency and profability of public-sector banks to make their shares attractive to the market. The council has suggested to the government that it align the implementation schedules of Basel III to timelines actually adopted in major advanced economies, rather than trying to become a frontrunner.


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