MUMBAI: Banks receiving capital support from the government will have to think twice before putting money in non-core businesses. This is a condition that has been laid down by the finance ministry which, however, has not spelt out the activities that can be described as non-core.
This was indicated in a letter by finance ministry to banks where the government is infusing capital.
“Public sector banks are not to invest their core capital in any joint ventures, funds, subsidiaries which is not a core banking activity without prior approval from the Government of India,” said the ministry’s letter to banks. Banks, however, are confused that the letter does not specifically define non-core activities.
The government will infuse about 20,000 crore capital in public sector banks, a move aimed at retaining their stake at 58% and also boosting bank’s core capital at 8%. Core capital includes equity and reserves. This is probably the first time that the finance ministry is imposing a pre-condition to capital infusion.
“What is considered as core banking activity is not specifically defined by the law. The other activities that the banks can undertake are listed in the Banking Regulations Act and banks can undertake these activities with the approval of the regulator,” says MR Umarji, chief advisor, at Indian Banks’ Association (IBA).
The government’s pre-conditions stem from the concern that a number of non-core banking activities, particularly life and non-life insurance activities, are capital guzzlers. Banks have to infuse capital for years in these ventures since it may take several years to break even.
“The government is worried that demand for capital will rise every year if banks decide to undertake these activities. As an owner, they will then be obliged to infuse more capital to sustain the bank, something they would want to avoid when the fiscal deficit is out of control,” said a senior bank official from public sector bank.
For instance, State Bank of India (SBI) has invested close to 1,000 crore in the life insurance business so far. However, bankers feel that they will have to provide the full range of financial services – sooner or later – to maximise on business opportunities.
At present, big banks like SBI, Bank of Baroda, Bank of India, Union Bank of India and Canara Bank provide several financial services such as life insurance, mutual funds and investment banking services mainly through joint ventures.
These are theoretically not core banking activities but are often described as para-banking activities and are aimed at providing the full range of financial services to their customers. However, most of the remaining PSU banks are focused on core banking activities. The Banking Regulation Act defines core banking activity as acceptance of deposits payable on demand for the purpose of lending and investments.
Several big banks like Central Bank of India, Punjab National Bank and Overseas Bank do not have any insurance or mutual joint venture but are looking at leveraging their branch network to provide these services through joint ventures. They will now have to take a closer look at their business plans following the conditions laid by the finance ministry.