RBI official asks banks not to use government capital to clean books

Mumbai: A senior Reserve Bank official said state-run lenders should use the capital received from the government to grow their credit books rather than clear their large pile of bad assets. "The banks should not be looking at the capital from the government to meet the risks. I think it must be to grow the balance sheet," RBI executive director N S Vishwanathan said in a conference organised by the industry lobby Assocham here. State Bank of India's managing director for compliance and risks, Rajnish Kumar, agreed that the fresh capital should be ploughed in for credit growth which helps the economy.

"If it is growth capital, then no problem. Then you are able to make a contribution to the economy by funding higher credit growth. But if the capital given by the government is all consumed by risk capital, then I think it is a real challenge," he said. He added that nearly half of the earnings are spent on loan loss provision by SBI and the situation is same for its peers. The government increased its recapitalisation commitment for this year to Rs 25,000 crore from the budgeted Rs 7,900 crore, and has also affirmed its commitment to allocate Rs 70,000 crore over the next three years to 27 state-run banks.

Stating that there is a need for banks to look at other sources of capital too, Vishwanathan said there is only a limited time to improve the overall risk management processes. Later, speaking to reporters, he said the banks have told the RBI that given the volatility in the market, it is difficult to raise money from the market. "You need more capital. It's a question of raising it from the market in an environment where perhaps the pricing is not great," he said. He hinted that RBI is looking at revising its estimate on the overall requirement of capital for banks as they gear up for implementing the stricter Basel-III capital framework.