EVEN as the government plans to infuse funds into the State Bank of India, it has a larger problem at its hands, of capitalising 10 other stateowned banks that are close of the 51% ceiling. This limits their options of raising capital to meet expansion needs. The government will consider infusing money into these banks, should they require it, sources in the ministry of finance have said.
“We will consider infusing funds into those banks that have reached the floor. If a bank approaches the government with a proposal justifying their need for capital, we will examine it. As the dominant shareholder in these banks, the government can capitalise the banks to work around the 51% limitation,” an official said.
The government does not want banks to dilute its stakeholding in hurry, as was done in the past. Andhra Bank, Dena Bank, Oriental Bank of Commerce, Bank of Baroda among others are close to the 51% ceiling.
Further, the government has become cautious about letting even those banks that might have enough headroom, because it feels that banks should be able to command sufficient premium to justify reaching the 51% level. This is another reason why the government is having a rethink about diluting its holding in SBI from 59.7% to 55%, it may instead go in for a rights issue.
In the event of the government infusing cash, its equity holding in the bank will be maintained. Infusion of capital will be treated as capital investment and the transaction will be within the bounds of the Fiscal Responsibility and Budget Management Act, an official said.
The government still has some headroom under capital investment and it will not have any revenue implications, a source said. “In any case, the amount can be recovered by way of dividends over the next few years,” he added. In the past, the government has provided capital to quite a few banks in the face of poor financials.
The board of Punjab National Bank has deferred its plan to dilute 6.8% of government equity and raise capital. It has not yet approached the government with a proposal for capital infusion. “We do not need capital at this point. We have deferred the plan to dilute government equity to raise capital. There are other debt instruments at our disposal,” a top official at the bank said.
Banks are cornered because there are limited capitalraising options available to them. They cannot access the market to raise funds, even as they are unable to meet their capital requirement through subordinate debts.
Banks can use other ways to meet expansion plans including raising capital through non-convertible preference shares to help meet capital adequacy requirements. However, there are limitations to using subordinated debt to ramp up capital, since there is a rider that subordinated debt cannot exceed 50% of Tier I capital according to prudential requirements.
Under the previous NDA regime, there was a proposal to amend the Banking Companies (Acquisition and Transfer of Undertakings) Acts, enabling the nationalised banks to bring down the Government shareholding from 51% to 33%. However, approaching the amendment now, will go against the principles in the National Common Mini-mum Programme (NCMP).