In its efforts to capitalise the public sector banks compliant with the Basel III regulations, the Finance Minister P Chidambaram has announced an equity infusion of Rs 14,000 crore in 2013-14, up from Rs 12, 517 crore of capital infusion announced for FY13.

The move is aimed to help the nationalised banks, which accounts for more than half of the gross bank credit in the system.

KR Kamath, CMD of Punjab National Bank, said that the government is committed to keep the public sector banks well capitalised especially under challenging economic conditions.

“Apart from the Rs 14,000 crore capital infusion by the government, banks can raise further capital from other sources like rights issue. This will enable banks to meet their capital adequacy requirements,” he said.

According to the Reserve Bank of India (RBI), majority of public sector banks had Tier I capital adequacy ratio of 8-12 per cent by end-March 2012.

However, the capital requirement of Indian banks would accelerate as Basel III kicks in on April 1 this year. As per S&P report, the Indian banking industry would have a $ 3 billion- $ 4 billion shortfall in capital if it immediately tried to attain an 8 per cent common equity Tier 1 ratio to comply with Basel III guidelines.

The final guidelines on implementation of Basel III capital regulations were issued by the RBI in May, 2012, and were to be effective from January 1, 2013 and Basel III to be fully implemented in India by March 31, 2018. However, during end of December, 2012, the RBI re-aligned the implementation date of Basel III Capital Regulations with financial year to commence from April 1, 2013.

After the capital infusion by the government, a higher capital adequacy would improve the credit profiles of banks, but it could depress their returns on equity. Delays in raising capital could also limit the loan growth of some banks.

The capital infusion would also increase the government shareholding of the public sector banks. During 2011-12, majority of public sector banks had government shareholding of more than the stipulated 51 per cent.

The finance minister also announced that all branches of public sector banks will have an ATM by March, 2014. During FY12, out of the total number of ATMs of around 58,000 for the public sector banks, on-site ATMs accounted little over 34,012. During the same period, the total number of branches of the public sector banks is around 67, 500. So the number of new branches that are required to have an ATM in the next one year would be more than 30,000 only by the public sector banks. In general, the number of ATMs in the system have grown 30 per cent since 2008.

Public sector banks already accounted for more than 60 per cent of the total number of ATMs as at end-March 2012, while close to one-third of the total ATMs were of private sector banks.

In addition, the FM also proposed to set up India’s first Women’s Bank as a public sector bank, with a provision of Rs 1,000 crore as initial capital, taking the number of public sector banks to 27 in India.

“Women are at the head of many banks today, including two public sector banks, but there is no bank that exclusively serves women,” Chidambaram said.

For the agricultural credit, he added that the interest subvention scheme for short-term crop loans will be continued and a farmer who repays the loan on time will be able to get credit at 4 per cent per annum. So far, the scheme has been applied to loans extended by public sector banks, RRBs and cooperative banks.

As per the budget recoomendations, the scheme would now be extended to crop loans borrowed from private sector scheduled commercial banks “in respect of loans given within the service area of the branch concerned’’.

Commenting on the budget, Chanda Kochhar, MD, ICICI Bank said, “Priority sector obligations are anyway applicable to both public and private sector banks and the budget is very comprehensively addressed the priorities of the country. In my view, the biggest priorities were fiscal consolidation and bringing back investments and in a way the budget has done a great job in trying to address both these priorities’’.

The FM also proposed Rs 6,000 crore to Rural Housing Fund in 2013-14, from Rs 4,000 crore in 2012-13.

“The Rural Housing Fund set up through the National Housing Bank would be used to refinance lending institutions, including Regional Rural Banks (RRB)s that extend loans for rural housing. So far, 400,000 rural families have taken loans,” he said.

“National Housing Fund has been provided additional funds to promote rural housing through refinancing and has also been instructed to set up an Urban Housing Fund. Further, additional tax incentives for the first time home owner is also a good move,’’ said Hemant Kanoria, CMD, Srei Infrastructure Finance Ltd.

Insurance sector

A multi-pronged approach to increase the penetration of life and general insurance in the country has been mooted in the budget.

A number of proposals finalised, in consultation with IRDA such as empowering insurance companies to open branches in Tier-II cities and below without prior approval of IRDA.

The know your customer (KYC) norms of banks would be sufficient to acquire insurance policies and banks will be permitted to act as insurance brokers.

Banking correspondents would be allowed to sell micro-insurance products and the government aims to achieve the goal of having an office of LIC and an office of at least one public sector general insurance company in towns with population of 10,000 or more.

Rashtriya Swasthya Bima Yojana, the national health insurance programme, to be extended to other categories such as rickshaw, auto-rickshaw and taxi drivers, sanitation workers, rag pickers and mine workers.

(Edited by Prem Udayabhanu)

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