On Thursday, report on Currency and Finance by Apex bank was released, which revealed that banks would need Rs 5,70,000 crore to finance their expansion in the next five years. The public sector would require two thirds of capital that comes up to Rs 3,70,000 crore.Thus on Thursday, Reserve Bank of India (RBI) informed that 20 public sector banks will experience an adverse effect on their growth, since Govt. holds a majority stake in these banks.

The public banks had asked for relaxation on the 51% floor on Govt. holdings, and this announcement has been passed at a wrong time. Public banks account for more than 70% of the business. The Parliament had been asked to amend the law that allows majority government control through a bill, which had been passed by it five years ago.

At the start of its term, the Manmohan Singh government had informed that it did not intend to change the public sector character of these banks and there has been no alteration in its stance. The Centre and RBI had given permission to the banks to issue hybrid instruments and preference shares, since banks were facing difficulties in raising the funds.

The foreign banks were not surprised by the RBI as it indicated that it will have a slow opening after carefully measuring concerns on concentration due to consolidation, potential conflict of interest and higher chances of contagion effects. Still RBI managed to have an unexpected position on public sectors banks. The acceleration is being expected by the regulator in the consolidation process.

Additionally, RBI informed, “The foreign banks, which had a lower cost of funds, were not passing on the benefit to borrowers and that was showing in the high net interest margins.” The increased competition can further lead to pressure on net interest margins.

RBI has mentioned that there would be a growing e-finance products that could bring in risks for banks and thus need to have proper safeguards. The bank also said that regulation of financial conglomerates posed a challenge for the regulators. The cost of intermediation is pretty high in the country, so it also advised the banks to maintain and improve their operational efficiencies.

RBI also suggested the public banks regarding the potential asset-liability mismatch due to increased exposure to the infrastructure sector. The sheet of other financial players could be balanced by transferring the long-tenure loans.