It is estimated that the banking sector may need an additional capital of Rs 1.60-1.75 lakh crore by March 2018, to conform to Basel-III norms on capital adequacy, even without factoring in providing for bad loans.
Yet another important contribution to the pressure on banks to raise capital could come from the ongoing efforts to expand the reach of formal banking. Bank lending is about 50% of GDP in India, while it is upwards of 100% of GDP for mature market economies.
It is not the case that the Indian economy manages to make do with little credit. It is just that enterprises, particularly those in the small and medium space, source their credit from non-banking sources.
If financial inclusion drives succeed in providing larger segments of the economy access to the banking system, bank lending would go up sharply, raising the demand for capital in proportion. Promoters of private banks may be able to mobilise the required additional capital; but can the government, the majority owner of public sector banks?
More importantly, is that the best use of taxpayer money? Or should government give up its fetish about majority-ownership and allow public sector banks to raise capital from the investing public, diluting its own stake to less than 51%?
The government can sell its stake to below the majority threshold as well. If it does, it can kill two birds with one stone: it can raise much-needed funds and also not have to pump in more equity. There is a widespread notion that state ownership of the bulk of banking insulated India from the worst effects of the global financial crisis.
There is also a lot of mythmaking about the wisdom and efficacy of India's financial regulation. Without belittling what is sensible in India's financial regulation, it is fair to say that the stunted nature of the Indian financial system, which underserves its $1.8-trillion economy, offered far greater insulation than public ownership of savvy regulation.