Small and mid-size lenders may be asked to focus more on retail loans as part of a government strategy to strengthen public sector banks. The finance ministry is of the view that some public sector banks (PSBs) are responsible for their capital requirement woes as they have not been following the basic principle of capital conservation. According to a senior banker, the government has sent a missive to PSBs asking them to take a step towards capital conservation. The ministry is of the view that banks can increase their profitability if they deploy a more stringent risk-based pricing and plough subsequent savings towards future capital, the banker, who did not wish to be named, said. The government wants banks to strengthen their due diligence mechanisms to bring down the risk weight, which determines the amount of capital that has to be deployed towards any loan exposure. Assets with lower risk weights require less capital to be held against them, allowing them to lend more with a given amount of capital. As per the ministrys estimates, state-run banks require Rs 2.4 lakh crore as equity by 2018 to meet capital requirements. Against this, the government has allocated Rs 11,200 crore for bank capitalisation in this fiscal year through March 2015. However, though small banks agree with the ministrys directive on capital conservation, they are against being restricted to just the retail segment. The fear that all large loans may turn bad, thus putting stress on the bank, is unfounded. You also need to support the economy at a time when credit growth has slowed, said an executive director of a PSB. The percentage of retail loans turning non-performing is very low. United Bank of IndiaBSE 1.86 % was barred by the RBI from lending more than Rs 10 crore to any single borrower late last year after its bad loans increased to a record high and capital adequacy fell to 9 per cent.
Posted on: Fri, 17 Oct 2014 04:25:38 +0000
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