Public sector banks on for a facelift
By Vaibhav Aggarwal
Mar 3, 2010
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Despite the people friendly measures adopted by the government in the budget in the form of interest rate subvention scheme, the budget has come up with quite some benefits for the banking industry.

The Finance Minister has declared in the budget that the government plans to put in money worth Rs. 16,500 crore for recapitalization of public sector banks. Banks like Allahabad Bank, Syndicate Bank, UCO Bank and Dena Bank are leading the charts of beneficiaries. This boost up package will, however, only help these banks meet their short term capital requirements.

Since the time when the Indian government signed an agreement for a loan worth $2 Billion with the World Bank last year, the issue of recapitalization of PSU banks has been an important topic.

However, only Rs. 1900 crore has been actually injected into the banks in 2009-10 in the form of perpetual preference shares.

If the Government still opts for the preference share capital route, then the current capitalization may not be equity dilutive.

As per RBI's estimations the core capital requirement of banks for the period 2008-2012 is Rs. 84,715 crores, assuming 20 % annual growth and also after accounting for internal accruals.

The recent talks about RBI giving banking license to many NBFCs, although good for a country which is under banked, is however, negative news for banks.

Although this step will lead India a step ahead towards achieving greater financial inclusion, but it will also increase competition level of existing banks and these banks' credit extension to NBFCs may also decline or come to a halt.

With the extension in the interest subvention scheme, the home loan takers will receive a relief of Rs. 10,000 for loan amounting to less than Rs. 20lakh. Although it will not have a direct implication on banks, but the interest subvention scheme may attract more borrowers and home loan demand might be maintained.


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