Capital for public sector banks

The government has been unable to amend the Banking Act to permit government shareholding to fall below 51% in public sector banks (PSBs)- the Left and the unions are dead set against it. But PSBs need fresh capital in order to grow. SBI management has been making desperate representations to government on this subject. It appears there is relief in sight.

Government shareholding in SBI is around 59%. The minimum government shareholding required under the SBI Act is 55%. That leaves room for raising around Rs 6000 crore of fresh equity. On top of it, ET reports, the government plans to infuse Rs 10,000 crore. I would have thought this would be unthinkable on account of the FRBM restrictions. But, ET reports some interesting calculations being done in government:

Assuming that the government infuses Rs 10,000 crore and if this is leveraged to build a portfolio by an additional Rs 1,00,000 crore, the resulting dividends and the tax on increased profits will make up for the government’s capital costs. Even at a 1% return on assets, the government could recover a significant amount from the bank, sources said.

And the move could set a precedent. The government’s stake in more than a dozen state-run banks is close to the minimum 51%. It is understood that it is open to infuse funds into these banks, should they require more capital.

As if this weren't enough, along comes a suggestion from C Rangarajan, chairman of the PM's Council of Economic Advisors. Rangarajan has mooted the idea of quasi-government entities such as LIC putting capital into banks.

Quasi-Government entities like LIC could be roped in to fund additional capital needs of public sector banks as they move to meet Basel II standards, Chairman of the Economic Advisory Council to the Prime Minister C Rangarajan said.

In case of Government's inability to bring in additional capital or reducing its share from 51 per cent, Rangarajan suggested funding from quasi-government entities such as the Life Insurance Corporation through an amendment in the statute.

"Government will have to bring in additional capital or reduce its share in public sector banks from 51 per cent through appropriate statutory changes," Rangarajan said, adding adoption of Basel II norms will enhance the required capital.

Well, well. I must say it is nice to see new ideas on the subject of capital for PSBs just when we thought they were up a blind alley.