Make fund infusion in PSBs a continuous process: Rangarajan

The Prime Minister's Economic Advisory Council Chairman C Rangarajan has called for continuous infusion of capital into the state-run banks, saying without which they will find the going tough in future.

Noting that public sector banks are well-capitlaised now, the former governor of the Reserve Bank said, "looking ahead, if the public sector banks (PSBs) are to retain their market share, the government must be ready to inject additional capital at periodic intervals. This must be a continuous process."

Currently, under the Basel II norms and the RBI mandate, domestic banks are well-capitlaised with nearly 12% capital base (tier I & II), while the mandate is only 9%, but when the Basel III norms kick in by 2019, the banks will have to shore up their core capital base to 12%.

Addressing a banking award function organised by the Business India magazine last night, Rangarajan said, "if the banking system is to remain competitive, there should be no bar on the entry of new banks. A closed system can only become oligopolistic."

At the domestic banking system is dominated by the 19 state-run banks with over 70 percent of market share, with the rest being controlled mostly by the domestic private banks and the remaining by the 40-odd foreign banks. The market leader SBI and its five associates alone enjoy over a quarter of the
banking system.

Late last month, the apex bank had issued the draft guidelines for new bank licences, nearly after a decade, which analysts say could at best be four to five. The draft guidelines have set stringent entry norms, which include barring those with over 10% revenue from stock broking and realty, and also caps FDI at 49% against the existing 76%, besides setting a networth of Rs 500 crore for the holding company against the present Rs 300 crore.

Pointing out that financial inclusion is becoming imperative, Rangarajan said, "the banking system must make an effort to bring down within its ambit the unbanked areas and the unbanked people" (which is nearly 50% of the total
population). 

Noting that though the current NPA levels are not threatening the system, he said there must be  continuous efforts to keep the bad loans ratio at a low level. The average NPA ratio is under 2.5% today.

Of late, banks have been reporting fresh slippages especially from the realty and small and medium enterprises sectors, following steep spike interest rates. Since March last year, the monetary authority has increased interest rates by record 12 times to tame inflation, taking the short-term
borrowing rate to 8.25%.