FinMin Talking to PSBs to Link Capital Support to Performance
Review to be based on recovery, lending and other operational efficiencies
New Delhi: The government plans to allocate capital to state-run banks on the basis of their performance and disburse just a partial amount to help them meet regulatory requirements.
The finance ministry is discussing the matter with these banks, officials said. “The initial idea was to allocate only 25% amount and the remainder based on the six-month performance review,” said one of the officials, who did not wish to be identified. The government has budgeted .₹ 25,000 crore for bank capitalisation in current fiscal, as part of its .₹ 70,000 crore capital infusion plans till 2019.
“The performance review will be based on recovery, lending and other operational efficiency factors. We want banks to also look at raising resources internally,” the official said.
Last year the government had decided to provide capital support based on performance as a tool of more effective utilisation of limited resources and also encouragement to laggards to do better.
Banks have opposed the linking of capital support to performance, especially when the sector is in stress.
A senior banker said that the banks have opposed the move, arguing that it makes no sense to give just 25% amount. “Our overall business plans also factor in the government support that we are due to get. Such half-hearted measures may only lead to further stress in the banking system,” he said.
Another banker said that the government should come out with a firm plan at the start of the fiscal rather than allocating capital at year-end.
“You review the performance on that basis and not allocate the amount when the bank is already struggling to increase credit growth or even meet regulatory requirements under Basel III norms,” he said.
A finance ministry official said the proposal is still being discussed and the government is open to suggestions. “Banks should realise that capital comes at a cost. Any capital allocation will be based on performance. The contours of it can, however, be discussed,” the official said.
The measures are part of the sevenpronged revamp plan called ‘Indra Dhanush’.
Finance Minister Arun Jaitley had said in his budget speech on February 29 that the government will provide additional capital if required by banks and will find the resources for doing so. “We stand solidly behind these banks,” he had said.