Noting that both public and private banks together need an additional capital of Rs 5 trillion (Rs 5 lakh crore) to comply with the Basel III regulations, he said, "the government needs to infuse Rs 90,000 crore into the state-run banks to maintain majority shareholding under the Basel III, which given its precarious fiscal position will be a difficult task."
The banks would need a total equity capital of Rs 1.75 trillion, and non-equity capital of Rs 3.25 trillion, taking the overall requirement for Basel III to Rs 5 trillion, the governor told bankers at a Ficci-IBA organised summit here.
"The government has two options: either to maintain its shareholding at the current level or bring down its shareholding at 51 per cent in all the banks across the board," Subbarao said.
"If the government wants to maintain its shareholding at the current level (by law it has to hold at least 51 per cent in each of its 26 banks), it will have to provide capital to the order of Rs 90,000 crore, (but) if it brings down its shareholding across all public sector banks, the burden reduces to just under Rs 70,000 crore," he said.
However, Subbarao added, "But will the government sacrifice its majority shareholding responsibility, rights and obligations or will it amend the statutes such that even if their shareholding comes below 51 per cent, it continues to enjoy the privileges of a majority shareholder."
The amount that the market will have to provide will be Rs 70,000 crore to Rs 1 trillion depending on how much the government will provide, he said, noting that the market has the capacity to offer this much funds as over the past five years banks have raised equity capital worth Rs 52,000 crore.
The RBI Governor also discouraged the government from issuing recapitalisation bonds to the banks, saying that such a move militates against fiscal transparency and it only postpones the issues to a later period.
"Providing equity of this size will be quite a significant challenge given fiscal constraints of the government. The tempting option would, of course, be to issue recapitalisation bonds but as we all know it militates against fiscal transparency," Subbarao said.
The average return on equity for the domestic banking system for the last three years has been around 15 per cent.
Noting that the implementation of Basel III norms is expected to result in a decline in the RoE in the short-term, he however said, "the expected benefits arising out of a more stable and stronger banking system will largely offset the negative impact of a lower RoE in the long-term."