Reserve Bank of India Governor D. Subbarao has said that the country’s banking sector may need an additional capital of Rs.1.60-1.75 lakh crore by March, 2018, to conform to the Basel III norms.
“Once operational, Basel III norms raise the cost of credit. Banks will need to raise additional capital, over and above their internal accruals and interest earnings, to meet the requirements,” he said.. But, questions are raised on whether the current banking system, predominantly led by public sector banks, can mobilise such huge capital. “Can they (public sector banks) do it?” he asked.
He was addressing presspersons here at the sixth anniversary of the Professional Risk Managers’ International Association’s Hyderabad chapter.
The RBI Governor opined that one option of meeting the requirement was provision of capital by the Government, which it could not do owing to fiscal deficit and natural resources demand constraints. The other option would be to opt for changing the public sector banking structure.
Private banks, on the other hand, could mobilise the required resources, evident from the fact that they rose Rs. 500 billion capital over the last five years. To queries raised on the regulator advancing the deadline for shifting to Basel III by a year, he said that the measure was necessitated as dragging the issue to the end of the next financial year could result in an ``awkward situation’’ and attract adverse international notice.
Dr. Subbarao cautioned bankers on maintaining capital adequacy, as credit-GDP ratio was going to go up, as the economy was structurally transforming. The country was shifting its base from services to manufacturing, which was credit-intensive. “You cannot accelerate to 9 to 10 per cent growth without it,” he said.
The shift to manufacturing would mean creation of jobs to millions who could leave agriculture, while millions of others coming into the banking fold would demand credit. He said the contention that the Basel II norms caused the crisis was, perhaps, partly valid, but not completely as Basel II encompassed operational risks and was tailor-made to suit individual institutions.
Recalling the economic crisis, Dr. Subbarao said the popular belief that the country was de-coupled from the crisis was a “myth”, as was the impression that price and macro economic stability would guarantee financial stability.
“Accelerated growth and low stable inflation probably jeopardised the financial stability as one does not know till the implosion takes place,” he said.
He stressed the need for putting better and higher quality data in place, along with the expertise to analyse and judge situations. Unlike the United States and other countries, India had not seen business cycles and “this could probably be the first”, he said.