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Government plans to rate PSU banks for fund infusion

Criteria under discussion include number of Jan Dhan accounts opened, financial inclusion programmes implemented, retail advances of each bank

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The government is looking at rating public sector banks going ahead for capital infusion for which these banks will be required to fulfil criteria, which are under discussion, such as the quantum of retail loans they disburse, the number of Jan Dhan accounts opened besides the return on assets and return on equity they earn.

The proposed moved may lead to a big push for retail loans by PSU banks with special offers to woo customers.

The finance ministry is setting up a rating system for public sector banks where their performance will be measured. Still in the planning stage, some of the criteria that are under discussion for the rating are the number of Jan Dhan accounts and financial inclusion programmes that banks have implemented, and the quantum of retail advances undertaken by them against their corporate advances.

The government's capital infusion into banks will depend on the rating that each bank earns on each of these criteria.

The Reserve Bank of India (RBI) scrapped its old rating system CAMEL (capital adequacy, asset quality, management, earnings, liquidity and system & control) in 2014 post financial crisis by switching to a risk-based supervision. The finance ministry's rating system will be in addition to the supervisory role the RBI is already doing.

A senior banker told dna that the government is of the view that a higher rated bank will enjoy equity support from the government unlike the practice earlier when government used to support the weaker banks with equity erosion. So, discussions are being held with banks along with the presentations on what they would like to have as the criteria. A committee under the aegis of the Indian Banks Association is finalising the rating mechanism.

In 2014-15, the government began to infuse funds on two performance criteria -- the first was return on equity for the past one year and return on assets for the past three years. But banks who were denied the fund infusion complained to the ministry that they were not informed about the performance-linked equity infusion plan of the government.

"The ministry in a statement issued in February said that this year, the government has adopted a new criteria in which only the banks that are more efficient would be rewarded with extra capital for their equity so that they can further strengthen their position."

Another senior banker who failed to get the fund infusion said, "The ministry's decision was impromptu and we were not prepared for it. That is why the ministry has decided to put a formal rating system in place so that banks can work towards achieving those specific targets."

The ministry is asking banks to focus on less riskier retail loans as the overall delinquencies on the retail book is smaller than the corporate book. Most banks are already focusing on retail loans. Banks with higher growth in retail loans will get a higher rating.

Retail loans are considered less riskier than corporate loans and, consequently, require lesser capital to be set aside for making provisions. On February 9, the government announced that it would infuse a total of Rs 6,990 crore into nine public sector banks including State Bank of India, Bank of Baroda, Punjab National Bank, Canara Bank and Syndicate Bank.

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