Financial holding company to leverage its capital base

Written by Sunny Verma | New Delhi | Updated: Mar 27 2012, 15:30pm hrs
The financial holding company (FHC) for public sector banks (PSBs) will substantially leverage its capital base to infuse funds into banks. The Union Budget had proposed the holding company would help the government infuse roughly R4 lakh crore into PSBs over eight years, without pressuring budgetary resources. It will not support bank subsidiaries like insurance or securities arms.

Official sources said the holding company was being set up mainly to leverage its balance sheet in such a way that banks capital requirements are met with minimal contribution from the exchequer. Indias fiscal deficit, estimated at 5.9% of GDP in 2011-12 and 5.1% in 2012-13, has made it tough to extend capital for banks.

The finance ministry has taken an in-principle decision to set up the company in the next fiscal. The Budget proposal to infuse R15,888 crore into banks in 2012-13 could be done through the holding company. In case R16,000 crore is infused into banks by the holding company, it can leverage its capital base by about R1.6 lakh crore, a senior official said. The Reserve Bank of India has supported the proposal to set up the holding company.

According to the committee led by finance secretary RS Gujral, banks will need Rs 3.5-4 lakh crore. This means the government will need to infuse Rs 50,000 crore every year for the next eight years. Such fund-raising from budgetary resources is difficult. Therefore, we will leverage the capital base of the holding company, the official said.

In its report submitted last December, the Gujral committee to estimate capital requirements of financial institutions suggested infusing only pure equity into banks. It also recommended creating a holding company.

Capital infusion into PSBs is critical to support their bankrolling of the economy. As a short-term measure, it is also necessary to provide for the rising non-performing assets (NPAs) in the system. NPAs have grown at a faster pace as the economic growth dipped from 8.4% in last fiscal to 6.9% in 2011-12.

Growth in NPAs during the first half of this fiscal has been the highest in the past six years as per RBI data and is currently estimated at Rs 1,06,000 crore. As far as the banks' subsidiaries are concerned, PSBs will have to capitalise them as the holding company would not buy equity of subsidiaries. At present, the purpose is to infuse capital only into banks. We do not intend to use the holding company's capital for the subsidiaries, an official said.

Besides capital infusion into banks, the holding company will also buy bank shares quoting their intrinsic value. This will help the government lower the cost of acquisition while supporting banks in difficult times. The government can take the help of Life Insurance Corporation in picking stocks in PSBs.

Last November, rating agency S&P raised its assessment of the Indian banking system while Moody's downgraded its outlook on India's Rs 64-lakh crore banking sector from stable to negative.

The government will pump in about Rs 17,000 crore by March-end in the banks. LIC, meanwhile, has been buying preferential equity in PSBs to capitalise them. In 2010-11, the government invested Rs 20,157 crore capital in state-owned banks.