Indian banks, particularly those owned by the government and facing an urgent need to raise capital, could get some relief.
The finance ministry has written to the corporate affairs ministry, asking the latter to exempt banks from the corporate-social responsibility spending mandated by the Companies Act.
The Act, which came into effect from the current financial year, mandates companies to spend at least two per cent of their average net profit for the immediately preceding three financial years on CSR activities.
The CSR provisions within the Act are applicable to companies that have annual turnover of Rs 1,000 crore (Rs 10 billion) or more, or net worth of Rs 500 crore (Rs 5 billion) or more, or net profit of Rs 5 crore (Rs 50 million) or more.
Almost all commercial banks have made profits of more than Rs 5 crore in the past three financial years.
The Act also requires companies to set up CSR committees comprising their board members, including at least one independent director.
Profitability growth of bank groups differed significantly last financial year.
The new private banks were able to maintain a healthy growth rate of 19.7 per cent in their profit after tax during 2013-14, compared to a contraction of 30.7 per cent in the net profits of public-sector banks during the year.
According to the finance ministry, since the country is considered a bank-led
All private-sector banks, both old- and new-generation ones, are incorporated under the Companies Act, and so are foreign banks’ branches.
Nationalised banks are incorporated under the Nationalised Bank Act.
Though it is not clear if public-sector banks also need to spend on CSR activities -- Reserve Bank of India laws allow them to make donations -- the finance ministry wants all banks to be exempted from the stipulation for now.
If the corporate affairs ministry agrees to the request, it will be a big relief for banks, particularly the public-sector ones.
The move comes at a time when the government is constrained in infusing capital into state-run banks.
According to the government’s own estimates, public-sector banks will need Rs 2.4 lakh crore (Rs 2.4 trillion) of capital infusion over the next five years, mainly to meet the Basel-III norms and to fund their business growth.
Banks’ capital positions are under pressure due to mounting non-performing assets and this is putting pressure on profitability.
Also, from April 1 next year, banks will have to treat restructured assets as NPAs, for which provisioning requirement will go up sharply.
At present, standard restructured assets require a provisioning of five per cent, while sub-standard assets need provisioning of 15-20 per cent, depending on whether a loan is secured or not.