Reserve Bank of India Governor D. Subbarao has laid out the governments difficult predicament. India is committed to the Basel III framework for bank capital regulation,he says. The framework requires adding Rs 5,00,000 crore to the capital of the Indian banks by March 2018. Of this,Rs 1,00,000 crore has to be government cash,to be put in the safe of the public sector banks,if the present level of its shareholding in the banks continues. This would require the finance ministry to sequester Rs 20,000 crore each year towards these banks. Since these are part of the Tier-I capital of the banks,the government cannot get away by issuing bonds with or without a lock-in period as an alternative to coughing up the cash.
The alternatives,then,are clear. Either UPA 2 creates more havoc with the fisc by borrowing even more from the market each year to keep the banks liquid or it accepts the inevitable and agrees to reduce its shareholding below the threshold of 51 per cent in these banks. The decision is difficult and not only for this government even Yashwant Sinha,having announced the measure as finance minister in the NDA government,could not implement it. The alternative is to starve the economy by refusing to let the banks grow. As the governor pointed out,India is trying not only to grow,it is also trying to make the process a more manufacturing-driven one. Since each one per cent rise in manufacturing-led GDP growth demands more bank credit than a service-led one,the demand on the banks can only rise. It is impossible to believe that any government can afford to ignore these challenges. Four years after Lehman in September 2008,governments could point to the advantages for risk capital of a majority holding in banks,but that cannot be at the cost of the economys growth.
Since June,when the RBI announced it had adopted the Basel III norms for the Indian banking sector in line with global trends,Subbarao has articulated his concerns at various fora. On Tuesday,he presented his most detailed analysis yet of the available options. As RBI governor,he can only go this far. An alternative to the government safeguarding its majority holding in public sector banks,is to provide additional shareholding rights to the government even when its stake in the banks slips below the majority limits. These alternatives must be assessed and decided upon soon and that means some tough decisions ahead.