The government is planning to infuse Rs 16,000 crore in over a dozen public sector banks by subscribing to equity shares through right issues. The move is aimed at bolstering banks' capital base and help them meet the domestic financing requirements.
United Bank of India, Dena Bank [Get Quote], Bank of Maharashtra [Get Quote] and IDBI Bank are expected to be among the next set of banks whose capital infusion proposals will be taken up.
In her address to Parliament on Thursday, President Pratibha Patil talked about the government's plans to recapitalise public sector banks.
While all public sector banks have over 9 per cent capital adequacy ratio, the government intends to provide them capital to help them step up lending as funding from overseas sources has dried up due to the global credit crisis. The 51 per cent floor on government ownership is limiting the ability of these banks to access capital markets to raise fresh equity. Though even the Reserve Bank of India has talked about the need to lower the floor, the President on Thursday said the government intended to maintain its holding in public sector companies at above 51 per cent.
The government had earlier said that it intended to provide around Rs 20,000 crore recapitalisation over two years. It has already provided over Rs 3,800 crore to Punjab & Sind Bank, Vijaya Bank [Get Quote], Central Bank of India and Uco Bank [Get Quote] to help shore up their capital adequacy ratio. In addition, the government had provided Rs 10,000 crore to State Bank of India [Get Quote] in March 2007 by subscribing to its rights issue. The Rs 16,000 crore to be provided now does not include the Rs 20,000 crore that the SBI has sought afresh.
Between 1985-86 and 2000-01, the government had provided public sector banks Rs 20,446 crore, but it was largely meant to help them clean up the balance sheet and raise their capital adequacy levels.
Sources in the government said that negotiations with the World Bank to raise around Rs 16,000 crore long-term debt were in advanced stages.
They added that in a majority of the cases, fund infusion would take place through a rights issue.
The government, as promoter of these banks, was expected to subscribe the entire right issues in case the public refused to participate. "Besides bolstering the net worth, the move is aimed at increasing government holding to above 60-65 per cent, depending on the participation from the public, so that if these banks want to raise funds in future, they can do follow-on issues," said a source.
The proposed recapitalisation by the government will also bolster the net worth of the banks and help them leverage it to raise more funds. "Since it is Tier-I capital, banks will be able to leverage it by over 10 times. This in effect means that banks can borrow 10 times of Rs 16,000 crore, equivalent to Rs 160,000 crore (in the form of deposits). This will increase the availability of money for corporate houses," the executive director of a leading public sector bank said.
In addition, the government has already allowed India Infrastructure Finance Company (IIFCL) to raise Rs 40,000 crore through tax-free bonds, which would be used to provide re-finance facility of up to 60 per cent of the loan given by banks to infrastructure sectors. This would help implement projects worth Rs 1,00,000 crore provided they had a debt-equity ratio of 75:25.
Once these two avenues open, there could be flows of nearly Rs 2,00,000 crore into the banking system, which in turn would be available for the India Inc. The proposed infusion in the form of equity would also help these banks take large size projects in sectors such as power and infrastructure, bankers said.
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