The Hindu Business Line : Capital ideas

As the economy gears up for the next round of expansion, the inevitable question most banks are going to face is about their capacity to meet the challenges and opportunities that will now come their way. At a recent meeting with the Governor of the Reserve Bank of India (RBI), bank chiefs were optimistic that credit growth which had remained sluggish at less than 15 per cent would pick up to 20 per cent or more by the year-end. Banks are well served with liquidity; but pl anning for the future means ensuring banks are more than adequately capitalised to service the hidden potential of the upcoming expansion. Recent policy announcements indicate North Block’s concern on this score.

Even though public sector banks have met the Basel-II norm with a capital adequacy ratio of at least 8 per cent, policymakers are right in looking to expand the capital base of smaller banks to around 12 per cent to enable them to meet the challenges of a renewed business cycle. To that extent the World Bank loan of $2 billion for some banks would seem to make sense but only in the absence of other options. North Block has variously expressed the feasibility of mergers of mid-sized banks as an eminent route to that same goal. Recently, the Finance Minister, Mr Pranab Mukherjee, advocated that strategy, followed by Mr Ashok Chawla, the Finance Secretary; North Block thus seems to have endorsed the idea, never so far formally stated, of banks with larger balance sheets. But the RBI may have differing views; as deputy governor-designate, Mr K. C. Chakrabarty in June felt, financial inclusion was a more urgent task than bank mergers for which he felt the time was not “ripe”. The finance secretary’s view that size determines the cost of funds is well taken but policy has to move beyond that principle to an operational course of action given the strong opposition that mergers have generated from the employees of public sector banks. So far the soft option has been the aid from the World Bank; but banks have to become self-generating sources of capital expansion; mergers are one option and of course, the other is dilution of government stake even below 51 per cent, if necessary.

A combination of the two would help expand balance sheets but also create concerns about forced mergers and diminishing competition. Given its record so far, the RBI is a better agency to monitor bank consolidation than the Competition Commission; not only would it continue to exercises oversight of banking, it would also ensure public policy is well served.

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