Govt asks public sector banks to save money and grow at same time

MUMBAI: A cash-starved government is wielding a stick on public sector banks by asking them to conserve capital through cost-cutting while sticking to loan growth targets, throwing bank executives into a tizzy.

The government, which has admitted that it will fail in borrowing and fiscal deficit targets, has told banks to strengthen their tax departments to ensure there are no slippages in revenue to the exchequer.

State-run banks, which control three-fourths of bank lending, should take insurance cover on loans to exporters and small & medium companies, and cut costs to boost profitability, a bureaucrat in the finance ministry has written to banks recently listing half-a-dozen such items. These and other measures will improve the capital position, it said.

"While a bank can conserve capital by stumping growth, that is something they do not want," said a chairman of a bank who did not want to be identified.

"In the board meetings, Finance Secretary DK Mittal has said we should grow by 30-40% instead of the average 20%. He also told us to look at ways to generate capital to reduce reliance on government."

Prime Minister Manmohan Singh's government is dithering on investing capital into banks due to crippled fiscal position as slowing growth cuts revenues and welfare schemes eat up resources.

This letter comes amid uncertainty over whether the nation's biggest lender, State Bank of India, which has been demanding about Rs 20,000 crore of capital, will get it. The government doesn't want to reduce its holding in these banks either, preventing them from accessing capital from investors.

Source: EconomicTimes