A case for stake dilution in PSBs

A case for stake dilution  in PSBs

“As a prudent economic decision, there is a case for government to reduce its ownership stake in the PSBs” the Reserve Bank of India remarked in the discussion paper on ‘Banking Structure in India – The way forward’ compiled in August 2013. This was made with the objective of reducing the country’s fiscal burden in meeting international standards on capital requirements of public sector banks and also facilitate smooth consolidation in the Public Sector Banks (PSBs) which account for nearly three-fourth (70-75 per cent) of the assets/business of the banking industry.

Further, on October 3, the Finance Ministry in consultation with the RBI Governor, decided in principle, to infuse “additional capital”, apart from the already budgeted amount of Rs 14,000 crore for 2013-14, with a view to enabling public sector banks to lower interest rates on select sectors like auto and consumer durables.

As against Rs 12,517 crore provided in 2012-13, the government has already hinted about its proposal for recapitalisation of PSBs to the extent of Rs 17,000 crore in the current fiscal. According to a recent assessment by global rating agency Fitch, with slow earnings growth and higher credit costs, the capital position of banks may appear weaker and their dependence on government for injection or infusion of capital bound to grow.

Basel norms

The government has been supporting PSU banks in capital augmentation to comply with the moving target of Basel norms, be it Basel I, Basel II or the current Basel III requirements. Government has gone on record by giving in-principle nod for providing need-based capitalization to banks till 2018-19 for ensuring Basel III CAR (Capital to Risk Weighted Asset Ratio) by stipulating certain terms and conditions during the way up to full Basel III compliance.  

According to the RBI, PSBs require combined injection of nearly Rs 90,000 crore over five years till March 2018, to enable them to comply with the ongoing as well as goal-post changing international norms under Basel III.

Basel III is trying to improve the quality as well as consistency of the capital fund structure, increase the charges for counterparty credit risk and reduce capital buffers. This is done simultaneously with new financial instruments being floated to enable the shift of credit risk from the originator.

With a view to deliver value to the real sectors of economy, banks in India are going ahead with effectively implementing Basel III norms, a radical approach to risk management in banks. Basel norms can no longer be brushed aside as a compliance function. According to RBI, most banks are adequately capitalized to take any shocks on the NPA front based on the escalated provisioning requirements.

Government stake

It is a matter of fact that on the one hand, the dominance of PSU banks has contributed to all-round growth for nearly 45 years and financial stability in the wake of global financial crises, while on the other, budgetary constraints as well as the shareholding cap fixed by the government at 51 per cent, and meeting Capital Adequacy Ratio (CAR) norms, has cast a heavy financial burden on the central government.

The government’s stake in PSBs varies from 55 per cent in Vijaya Bank to as high as 85 per cent in Central Bank of India. Here, the headroom available for further tapping the capital market is quite insignificant at less than 10 per cent currently, when the overall cap is kept at the 51 per cent level.

Therefore, there may be an urgent need to bring down the government stake to below 51 per cent, say 33.3 per cent for the time being, adopt the Financial Holding Company (FHC) model and bring in a Differential Voting Rights (DVR) mechanism to play a major role. The way to achieve capital infusion in the banking sector while managing fiscal consolidation is to widely distribute the ownership pattern in the banks, which requires courage on the part of the government of the day; for, it is believed that such a move would loosen the control of government over PSU banks, thereby defeating the purpose of nationalization of the banking sector four-and-a-half decades ago.

(The author is a chartered accountant and banking and financial analyst.)

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