Indian banks need to raise Rs.1.75 trillion capital by 2018: RBI

Reserve Bank of India Governor D. Subbarao Saturday said the Indian banks will have to raise an additional capital of Rs.1.6 trillion to Rs.1.75 trillion by March 2018 to conform to the Basel-III capital adequacy norms.

"Our own estimate show that after accounting for whatever banks will generate by way of internal accruals and interest earnings, the banks should raise an additional capital of 1.6 to 1.75 trillion rupees," he said while speaking on risk management at the Centre for Economic and Social Studies here.

Developed by the Basel Committee on Banking Supervision, Basel-III is a set of reform measures to consolidate the regulation, supervision and risk management of the banking sector.

The reforms are aimed at propping up the banking sector's ability to absorb shocks arising from financial and economic stress and improve risk management.

The RBI has set a deadline of March 2018 for Indian banks to complete their conformation to the Basel-III norms.

The RBI governor said the Indian banking sector could raise the additional capital and pointed out that the Indian banking system as a whole raised Rs.500 billion from the market during the last five years.

"Can public sectors banks raise the additional capital," he asked while noting that 70 percent of Indian banking is in public sector.

Subbarao said given the constraints of government because of fiscal deficit, it would be difficult for the government to infuse the additional capital. "There will alternatives before the government either to reduce shareholding to 50 percent or change public sector banking or restrict its expansion."

"Private banks can probably raise the additional capital," he said.

The RBI governor said Basel-III raised the cost of credit when the economy needs more credit. "The demand for credit is going to go up. Credit GDP ratio is something like 25 percent today. The banking system has to supply the credit."

He said the demand for credit would also go up as the country was shifting from services to manufacturing sector.

"The manufacturing sector is more credit-intensive. We need to be focusing on manufacturing because you can not accelerate from current level of 6.5 percent to 7,8,9 and even 10 percent without a focus on manufacturing.

You can not provide jobs to hundreds of millions of people who are going to be released by agriculture sector in the other sectors unless you focus on manufacturing," he said.

The governor noted that the world has been going through crisis for last four years and that that are lot of lessons emerging from it.

Stating that the financial stability is important, Subbaro said over last four years, they have seen financial instability taking a devastating toll on growth and welfare.

"We thought that as an emerging economy, we are decoupled from the advanced economies. Because of our reforms, financial sector being more resilient, industrial sector growing, foreign exchange reserves are sufficient but the crisis has proved decoupling is a myth."

"In a rapidly globalising world, national and international stability are interlinked. If there is financial instability anywhere in the world it will hit you no matter how much you protect your financial system. We have seen the evidence of this in our own country over last four years how financial sector affected by what is happening around the world," he added.

Subbaro said another lesson from the crisis was that the price stability and macro stability don't guarantee financial stability.