RETAIL BANKING | Cesar Tordesillas, India

India's state-run banks directed to optimize capital utilization

India's state-run banks has been directed by the Finance Ministry to assess capital requirements, including investments in JVs or subsidiaries.

This is to allow them to devise strategy for optimal capital utilisation.

Banks will have to seek approval from their boards on their capitalisation plans. This plan should also includerecoveries against loss assets and profitability as per the memorandum of understanding with the government.

The ministry feels that given the large capital requirement, banks should have well-thought out plans.

"Banks have been told to make an assessment of the capital requirements considering the Basel III requirements," said a finance ministry official. The capital regulation norms based on Basel-III standards will start rolling out from January 2013.

Financial services secretary DK Mittal had earlier said that the public sector banks would require about 3.5 lakh crore in the next 10 years. The government is also reviewing its plans to convert its perpetual bonds andpreference shares in state-run banks into common equity.

The new prudential norms under Basel-III will restrict Tier-I capital to common equity and retained earnings.

Banks have also been asked to improve their low-cost savings and current deposit or, employee branch ratio and profit per employee.

They have been further directed to put 80% of their total staff in branches and only 20% in head offices. Banks have to also identify and close down loss making delivery channels to improve profitability.

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