India needs to examine the feasibility of inducting ‘skilled financial firms’ as strategic investors with, say, 10 or 15 per cent stake in public sector banks (PSBs), RBI Governor Raghuram Rajan said, adding that this could help drive governance and help the banks deal with their current problems.
The experience of countries, such as China, which inducted such investors, is worth studying, Rajan said in his CD Deshmukh lecture in the Capital.
However, many experts say that this may require an amendment to the existing bank nationalisation law, under which non-resident shareholding in public sector banks is capped at 20 per cent. SN Ananthasubramanian, an advisor to public sector banks and former ICSI President, told BusinessLine that many such “trial balloons” have been floated in the past, but with no credible steps.
“Unlike private sector banks, the 20 per cent limit of non-resident holding forms part of the Bank Nationalisation Act, and this calls for an amendment (if non-resident strategic investors are to be allowed a 10 or 15 per cent stake),” he said, adding that this type of amendment is a long way off.
However, an amendment may not be required if domestic financial firms are allowed to be inducted as strategic investors.
Bank mergers In his lecture, Rajan said that talking of bank mergers, which take a lot of management attention, is probably premature, especially when each bank management is preoccupied with dealing with stressed assets. As bank health recovers, the issue of mergers can be addressed, Rajan added.
Rajan said the RBI was also working on identifying currently “non-recognisable capital” that is already on bank balance sheets, such as undervalued assets.
“The RBI could allow some of these to be counted as capital according to Basel norms, provided a bank meets minimum common equity standards,” he added.
His remarks indicate that RBI may, in the coming days, allow banks’ revalued assets to be counted as capital.
Reacting to Rajan’s remarks, V Kannan, former Chairman and Managing Director, Vijaya Bank, said the proposal when implemented will be a welcome step.
This “will supplement the efforts of banks in mobilising capital. The capital requirement of PSBs is very high,” he added
In the early 1990s, too, the RBI had allowed public sector banks to treat a portion of re-valued assets as capital, he said.