The recent spat between Sebi and Irda over ULIPs had raised the question of governmental supervision in their activities. However, Finance Minister Pranab Mukherjee clarified that government has no intention do so; various regulatory agencies such as RBI, Sebi and Irda would continue to enjoy autonomy. The FM was addressing media at the conclusion of the meeting with chief ministers of the southern states and heads of public sector banks in Hyderabad on Tuesday.

Mr. Mukherjee said that government would step in only if there is a conflict between regulators regarding the jurisdiction of hybrid products like ULIPs. He said that government would pass an ordinance to introduce a joint mechanism to earmark the jurisdiction of conflicting regulators. “Except this, there will be no interference by the government,” he added.

The finance minister called for increase in advances by banks to micro, small and medium enterprises (MSME) sector. He said that banks should work towards achieving the target of raising their share of advances to the sector to 50% by the end of the current fiscal and 55% by next, as this is a vital part of the financial inclusion program. He said banks should also chip in by ensuring smooth credit flows to sectors such as housing, education and weaker and minority sections.

The minister also commented on the current woe of Indian economy, namely, inflation. He said until May, food items contributed mostly to inflation; food price inflation almost touching 20% at the fag end of last year. Though food prices have come down to below 15% now, inflation has become broad-based and is rising due to fuel prices and other components.

Five public sector banks – Bank of Maharashtra, Central Bank of India, IDBI Bank, UCO Bank and Union Bank of India – will benefit from the Rs 6,211 Crore capital infusion by the government. This was approved by the Finance Ministry yesterday. The capital infusion is part of the budgetary promise to provide a sum of Rs 16,500 crore to public sector banks to help them attain a minimum 8% Tier-I capital by March 31, 2011.

The Bank of Maharashtra, UCO Bank and the Union Bank of India would receive a capital of Rs 590 crore, Rs 375 crore and Rs 111 crore respectively through issuance of Perpetual Non-Cumulative Preference Shares (PNCPS). The government is planning to infuse Rs 2,016 crore in the Central Bank of India by participating in its rights issue and Rs 3,119 crore in IDBI Bank by way of preferential placement of equity.

The government had earlier infused Rs 1,500 crore in 4 PSBs during May, 2010 and another Rs 1,200 crore in 3 PSBs during March, 2010.

The capital infusion in PSBs entails certain conditions stipulated by the government. The performance of these banks will be closely watched by the government to ensure compliance of stipulations and maintenance of desired capital.

The banks would be able to utilize this capital to increase their lending power to productive sectors of the economy. This, in turn, would promote economic activity, in addition to increasing government revenue in the form of taxes and dividends.

With this, the total capital infusion by the government during the last four months totals an astounding Rs 8,911 crore, the highest in PSBs in the recent past.

Even as economists of the world look towards India optimistically, statistics say that all is not well. The credit outlook for most Indian banks remains negative after the changes made in January earlier this year. Though the fundamental credit outlook was stable, the economic conditions still remain challenging and the number of problem loans or ‘bad’ loans still continues to be on the rise. Of course, the result of all this is an adverse effect on the quality of assets.

It has been estimated that even in the next twelve to eighteen months, things are not going to change for the better. There are no optimistic projections for the next year or two. The public sector banks, which make up the majority of the banking systems and assets, continue to hold a strong front. The concern for the deteriorating asset quality still looms large.