Government reviews capital needs of banks

index.jpgSource: The Economic Times, Dec 26, 2016

NEW DELHI: The government is reassessing the capital needs of state-run banks after some lenders and the Reserve Bank of India raised concerns over stressed assets turning non-performing if demonetisation impacts demand for long.

“There were accounts that were already under stress. Banks say they may be further impacted due to the demonetisation drive,” a senior government official said, requesting anonymity. “If they move in the non-performing category—from substandard to doubtful—provisioning will increase, which will further impact banks’ capital.”

The official said banks are also worried as demonetisation has led to a surge in their deposits but they cannot deploy this money because of low credit growth. This means they will have bear more of the interest burden, which will ultimately impact their profitability.

The Narendra Modi-led government had on November 8 demonetised old Rs 500 and Rs 1,000 notes. The two notes accounted for about 85% of the cash in circulation.

But a finance ministry official said the exercise to assess capital needs was routine and one cannot draw a direct link with demonetisation.

“We are interested that the banks should grow and be stable. I would not draw a clear-cut linkage with the demonetisation drive,” the official said, adding that the banks were well capitalised at present but the government was still trying to ascertain if it needed to pump more money in them before the current fiscal year comes to a close on March 31.

“We have had some discussions with the RBI. They had shared some parameters, and we are in discussion with banks on what their assessment is,” the official said.

According to latest RBI data, bank credit growth slumped to 5.8% as on December 9 from 10.6% in 2015. Deposits with banks had risen 15.9% till December 9 as against 10.9% in the whole of last year. The finance ministry has allocated Rs 22,915 crore capital to 13 state-run banks this fiscal year.

It had said that 25% of this will be disbursed in line with performance parameters such as efficiency, growth of credit and deposits, and reduction in the cost of operations.

“It now appears that most banks will not be able to meet this stringent criteria. Besides, the credit growth, which had already slowed, has been further hit by demonetisation,” said an executive director with a state-run bank. “We have been allocated a paltry Rs 86 crore. We have not yet gone ahead to seek it.”

The executive said in case most banks fail to meet the criteria, the government will have another Rs 6,000 crore to allocate. “This may provide the government some cushion.”

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