My letter in FE..

My letter in Financial Express dated 19th Oct 2010

Recently,I read the following article in the FE and wrote a letter to the editor, by way of my response,which has been published as under :

The article :

Govt to infuse Rs 8,700 cr in PSU banks

Oct 13, 2010 FE

New Delhi : The Finance Ministry said it will provide equity support of about Rs 8,700 crore to the public sector banks, a move that will enable lenders to raise funds from the capital market without diluting the government holding to below 51 per cent.
 
“Next tranche of the capital infusion in the banks will be to raise government’s holding in the public sector banks to certain level, which is being worked out,” Department of Financial Services Secretary R Gopalan said on the sidelines of Orient Grameen Swarojgar Card launch by Oriental Bank of Commerce.
 
“So that at time when we are not in a position to fund them through budgetary resources they will be in position to go to the market and raise resources to beef up their Tier I position,” he said.
 
The government is also conscious of Basel III requirement where addition Tier I capital has been prescribed, he added.The government will look at those banks where government’s holding is at minimum at 51 per cent.In the first tranche the government has approved capital infusion of Rs 6,211 crore in the five public sector banks announced in June this year.

Finance Minister Pranab Mukherjee in his budget speech this year announced that the government planned a capital support of Rs 15,000 crore to public sector banks during the current fiscal to ensure that these entities could attain a minimum 8 per cent tier-I capital by March 31, 2011. 
 
As much as Rs 8,789 crore would be part of second tranche. There are six public sector banks-Bank of Baroda, Oriental Bank of Commerce, Andhra Bank, Dena Bank, IDBI Bank and Vijaya Bank where the government holding is less than 55 per cent.
 
The Centre’s holding in Bank of Baroda stands at 53.8 per cent, Oriental Bank of Commerce at 51.1 per cent while in case of Andhra Bank, it is 51.6 per cent. In IDBI Bank, Dena Bank and Vijaya Bank, the government holding is 52.7 per cent,51.2 per cent and 53.9 per cent respectively.When asked if the government had taken any decision on the State Bank of India’s proposal of Rs 20,000 crore rights issue, Gopalan said, “we are still examining. We have not finalised the assessment.” 
 
On the operations of microfinance institutions in the country, Gopalan said, “It is not possible for any one to control interest rates. It is just not feasible.” He added,”As far as we are concerned Microfinance Institutions Regulation Bill is in the offing, which is under consultation with number of stakeholders. In that Bill we will never have a provision of control of interest rate, as it is not feasible.” 
 
When asked if the Bill was likely to be tabled in the upcoming winter session of Parliament, Gopalan said, “it depends on number of legislative agenda there. We have finished consultation with stakeholders and we will have to look at taking it forward.”
My Letter:

Letters to the editor
The Financial Express  
Tuesday, Oct 19, 2010 

Infusion for PSU banks 

As reported in FE on October 13 (Govt to infuse Rs 8,700 cr in PSU banks), the finance ministry said it would provide equity support of about Rs 8,700 crore to the public sector banks, a move that will enable lenders to raise funds from the capital market without diluting the government holding to below 51%. Six public sector banks—Bank of Baroda, Oriental Bank of Commerce, Andhra Bank, Dena Bank, IDBI Bank and Vijaya Bank, where the government holding is less than 55%—will thus be able to raise funds from the capital market without diluting the government’s stake below 51%. The government must take care to ensure that other regulations, as per draft of new Basel III standard, are not lost sight of. These regulations include tighter definitions of Tier-I capital, according to which banks are supposed to hold 4.5% by January 2015 and then going up to 7% in due course. Further, it is important to have a proper framework for counter-cyclic capital buffers, adequate measures to limit counter-party credit risks, and a global minimum liquidity standard for internationally active banks that includes a 30-day short-term liquidity coverage ratio requirement underpinned by a longer-term structural liquidity ratio. These stipulations will insulate PSU banks from financial disasters and market stress and keep them globally competitive and strong in the times to come. Hopefully, finance ministry will also keep these in mind while effecting the capital infusion.

JS Broca, New Delhi

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