Budget 2013: FM proposes Rs 14,000 cr capital support to banks in FY14

Moneycontrol Bureau

The Union Budget 2013-14 proposed to provide a sum of Rs 14,000 crore capital support to all public sector banks. This will help maintain their minimum tier – I capital of 8% under Basel III.  In turn, lenders can expand their loans maintaining the growth in the balance sheet. During FY13, GOI had budgeted for Rs12,000 crore.
As per the RBI estimates, Indian banking system needs Rs 5 lakh crore capital by FY2017-18 to meet new Basel-III norms. They are also of the view that government needs to pump in Rs.90,000 crore worth of capital to retain its shareholding in the PSU banks. Capital infusion by GOI in many PSU banks would enhance their Tier-I capital above 8% mark and would be helpful in growing their balance sheet.
Earlier, the government had appointed a high power committee headed by the finance secretary to assess the capital requirement of various PSBs for the coming 10 years, keeping in view Basel III norms, that call for higher equity infusion in banks.  As per those norms, banks are required to maintain a minimum of 4.5% tier I capital (excluding perpetual bonds). However, the Reserve Bank set it at 5.5% for Indian banks.
Domestic banks will be easily able to deal with the additional capital requirements to comply with the Basel-III norms, but there will be funding difficulties, especially for the government, to fund banks in FY17 and FY18 by when the requirements will peak, the global rating agency Standard & Poor's (S&P) recently said in a report.
"We expect the immediate shortfall to be around USD 3-4 billion but till March 2018, we expect the system to require up to USD 15 billion in fresh capital, assuming a credit growth of 18 percent and their adherence at meeting the core tier-I capital requirement of 8 percent," said Geeta Chugh, a credit analyst from S&P. This is what banking industry was expecting from the Union Budget 2013 Capital infusion Expected:  Recapitalization of state-owned banks by Rs15,000 -18,000 crore mostly in the form of tier- I capital.
As per the RBI estimates, Indian banking system needs Rs 5 lakh crore capital by FY2017-18 to meet new Basel-III norms. They are also of the view that government needs to pump in Rs.90,000 crore worth of capital to retain its shareholding in the PSU banks. Capital infusion by GOI in many PSU banks would enhance their Tier-I capital above 8% mark and would be helpful in growing their balance sheet. Agricultural lending Expected: Increase in the agriculture lending targets to be raised further (18%) along with maintaining the interest subvention scheme at 3% level. The lending target was hiked from Rs.4.75 lakh crore in FY12 to Rs.5.75 lakh crore in FY13. Continued focus on financial inclusion as well thrust on rural economy. Government borrowings (loan) Expected: At the same level like in FY13. Gross borrowing at around Rs 6 lakh crore as against Rs 5.70 lakh crore budgeted in 2012-13. Net borrowing below Rs 5 lakh crore, little changed from Rs 4.70 lakh crore slated for 2012-13. Any lower-than-expected borrowing is a positive for the bond market and government bond yields will fall further. However, yields will rise in case of higher borrowings. Supply of risk capital in infrastructure sector Expected: More supply of risk capital into infrastructure sector in line with Infra debt fund, IIFCL (India Infrastructure Finance Company). Typically, banks are wary of long term infrastructure funding as it creates asset-liability mismatch. The proposed measure is likely to rekindle investment climate. Tax free infrastructure bonds Expected: Government to allow banks going for long term bonds with a little tax break so that the future provision for infrastructure loans become better from lenders’ funding angle.