The government is considering diluting its stake on a priority basis in those banks where its shareholding is above 75%, as it mulls ways to gather resources to boost the capital base of public sector banks (PSBs) struggling with massive bad assets. While market conditions will play a crucial role in the stake sale plan, the government would first like to see its share trimmed below 75% in certain PSBs to achieve the twin goals of raising funds for recapitalisation and complying with the minimum (25%) public-float norm, a senior government official told FE. As of end-September, the government held more than 75% in eight PSBs — United Bank of India, Indian Bank, Bank of Maharashtra, Central Bank of India, Punjab and Sind Bank, Indian Overseas Bank, UCO Bank and Bank Of India. Proceeds of any stake sale in a PSB, however, may not necessarily be used for fresh infusion into that bank. “The government will take a call on eligible candidates for capital infusion, based on the urgency of requirement and other parametres,” said the official. Apart from public offering, the government is contemplating options, including selling stakes to institutions like LIC, to reduce its shareholding.
Importantly, barring Indian Bank and Punjab & Sind Bank, the government’s share in six of these eight PSBs have, in fact, risen this fiscal, thanks to its capital infusion under the Indradhanush plan. It has to reduce its stake to below 75% by August 2018 to comply with the minimum public-float norm. In the long run, though, the government intends to trim its stake in all PSBs to 52%. Also, the government’s shareholding in at least three banks — Syndicate Bank, Corporation Bank and Dena Bank — is between 70% and 75%.
This means any sharp capital infusion into these banks will see the government’s stakes in them inching towards or breaching the critical 75% mark. The government is constrained to consider various options to raise funds, given the gross inadequacy of the allocation of Rs 10,000 crore for capital infusion this fiscal and the constraints of extra budgetary resources in times of uncertain tax collections.
Global rating agency Fitch recently said that India’s public sector banks will require capital infusion of $65 billion to meet all of global Basel III banking rules by March 2019. It said the government has to pump in more than double the Rs 20,000 crore it had decided to inject in FY18 and FY19, even on a bare minimum basis.
The gross bad loans of public sector banks worsened to 11.77% of their gross advances to banks at the end of March from 9.91% a year before. Although credit growth has been muted in recent years, the rise of stressed assets has raised PSBs’ provisioning requirements, making capital infusion by the government so important.
As part of its Indradhanush plan, the government had planned to provide Rs 70,000 crore over a four-year period through 2018-19 (Rs 25,000 crore in each of the first two years and Rs 10,000 crore in each of the last two years) for the capitalisation of the PSBs. As for the public float norm, the government had in 2014 notified rules for a minimum 25% public shareholding in listed state-run companies. The move was aimed at promoting wider investor base in listed public-sector companies and boosting the government’s plan to raise funds from disinvestment.