Reducing its stake in public sector banks to below 50 pc is an option before the government to enable them meet capital requirement norms under Basel III, Reserve Bank of India Governor D Subbarao said.

He said Indian banks need to raise Rs 1.5 lakh crore to Rs 1.75 lakh crore as capital to meet the BASEL-III norms which are to be implemented by 31st March 2018.

Basel III international accounting standards were conceived after the 2008-09 financial crisis to strengthen banks’ capital base and improve their ability to withstand shocks.

“Question is can PSU banks mobilise this sort of capital, or can the government give this sort of capital. We are aware of the constraints on the government”, the RBI governor said in Hyderabad on Saturday.

“The alternate to the government is either to reduce shareholding below 50 per cent or slow down PSU growth,” Subbarao said in his keynote address delivered at Centre for Economic and Social Studies.

He was, however, hopeful that the banks in private sector may be able to raise the capital.

“Can private banks raise this sort of money? They probably can, because Rs 500 billion was raised in last 5 years,” Subbarao said.

Explaining the outcomes after the financial crisis in 2008-09, Subbarao said, though price stability and macroeconomic stability are important they do not guarantee financial stability.

“Not only that they do not guarantee financial stability but if you have macroeconomic and price stability for too long, you are probably jeopardising financial stability,” Subbarao said.

“Because, you become complacent, you are impervious; you’re plying to the cancer building underneath your belly. And when pressures build up, implosion takes place, he added.

He said the take away from this is that central banks and governments and all regulators need to pursue financial stability explicitly, not as a byproduct of price and macroeconomic stability.

Subbarao felt the collection of healthy institutions does not make a collective healthy system.

Banks are over confident during safe times and excessively panic during bad times, he said.

He said during the crisis period, it was thought India was decoupled from the affected economies because of the forex resources and regulations but the crisis proved that decoupling is a myth.

“We thought we were decoupled because of the reforms, because of our financial sector is more resilient, manufacturing sectors have grown, forex reserves are sufficient. We thought we were decoupled from the economies. But that proved to be wrong,” he said.