CAPITAL IN BANKS

First issue staring in the face of banking industry is capital.

Even though reasonably well capitalized today, banks will be facing the challenge of growing their business due to capital constraints.

India’s financial system is better at capital allocation than most of the emerging market players.

It has some high performing banks, very low stock of gross non-performing loans of about 2.5% and deep and liquid equity markets that efficiently discover price in stocks of globally competitive companies in BPO, IT, R&D, pharmaceuticals, automobiles, telecom and hospitality space.

Still one of the challenges will be capital raising by corporate sectors but not at the expense of agriculture, small industries and business.

Debate over channeling larger portion of available credit to the most potentially productive sector or to the sectors where the investment efficiency is lower is yet to be fully resolved.

In any case, to make banks allocate increased credit to the productive sectors of the economy is strongly predicated on the bank capital strength.

To do so, more capital would be required to be infused into banks.

With requirements of Basel III looming large, banks would be facing challenges in raising additional capital for meeting the funding needs of Indian economy potentially growing at 9% plus.