The government may have underestimated the capital needs of the PSBs since the PJ Nayak Committee report had put tier 1 capital requirements at R3.50 lakh crore by 2018. Other recommendations of the committee like creation of a bank investment company for the government to transfer holdings in banks and reducing the government's stake in PSBs below 50% have not been announced.
While preserving the public ownership, the capital for these banks will be raised by increasing the shareholding of the people in a phased manner, said Jaitley.
Analysts, however, feel the finance minister did not provide a clear road map on the divestment of stake in the public sector banks. There is no clarity on how R2.4 lakh crore would be raised, since it is not possible to raise the entire amount from retail investors, said Abizer Diwanji, partner at Ernst & Young.
The government at present holds 56-90% in PSBs. According to Capitaline data, in FY14, the government holding was highest in State Bank of Mysore at 90%, followed by 88.6% in Central Bank of India.
The finance minister said the PSBs will be allowed to raise long-term funds for lending to infrastructure sector. The PSBs will be encouraged to extend long-term loans to infra sector with a flexible structuring to absorb potential adverse contingencies, he added.
Commenting on the move, chairman and managing director at IDBI Bank MS Raghavan said, This is a welcome move as with minimal CRR, SLR and priority sector lending requirements, banks will achieve funds at lower cost. According to RBI data, bank lending to the infrastructure sector at the end of May 2014 was up 11.1% y-o-y and stood at R8,57,300 crore.
According to Karthik Srinivasan, senior VP & co-head (financial sector ratings) at Icra, the access to long-term funds for banks at minimal regulations will help banks partly reduce the asset liability mismatch and will be an important step in aiding banks meet the liquidity coverage ratios under Basel III.
Taking note of the PSBs worsening asset quality, Jaitley announced six new debt recovery tribunals (DRT) in Chandigarh, Bangalore, Ernakulum, Dehradun, Siliguri and Hyderabad. This is expected to reduce the NPA burden of the public sector banks and pave way for quicker recoveries.
Meanwhile, differentiated banking licences, as suggested in the Nachiket Mor Committee, could soon be a reality as the government announced that RBI will create a framework for rolling out bank licences.
Reacting to the announcements, the Bank Nifty fell 2% during the speech, however, it recovered and gained 2.95% before closing lower at 14,821.70 points (down 0.73%).