In a bid to take advantage of the bullish stock market sentiment, the India's finance ministry has kicked off the exercise to cut government stake in public sector banks to 51% and enable them to raise fresh capital to meet their growth requirements.
Sources said that the ministry has moved a cabinet note as the government is keen that banks are well capitalized to meet the funding requirement. With government finances already stretched, the BJP administration has decided that Centre's holding be cut to 51% against the UPA-decided level of 58%. Through this move banks will be able to expand their equity base by issuing fresh shares to the public.
While all state-run banks are well above the regulatory requirement of 9% capital adequacy ratio, several of them, led by State Bank of India, the country's largest lender with a quarter of the pie, will need more equity to meet the higher fund requirement of corporate and retail borrowers in coming years. A higher equity base will enable banks to issue more bonds and maintain capital adequacy ratio of around 12%.
Data available on the BSE website showed that government holding in at least six state-run banks is under 60% with at least four banks having capital adequacy ratio of below 12%. In his Budget speech, finance minister Arun Jaitely had announced the government's intention to cut its stake to 51%, which will ensure that the public sector character is maintained. The government decided to reduce the floor on its holding as it could only spare a little over Rs 110 billion for recapitalizing public sector banks. The rest of the funds, it said, need to be raised from the market.
The government has estimated that state-owned banks will need around Rs 2,400 billion till 2018, which they may not be able to raise from the government. It has asked banks to sell non-core assets and initiate several other measures to meet the funding needs but experts believe that these options will have limited impact and the only solution is for the government to reduce its holding below 50%.
The Atal Behari Vajpayee government had proposed to reduce government holding in state-run banks to 33% but the amendment could not be passed in Parliament as Congress, which was the main Opposition party, blocked the move. This time the NDA government had decided to stick to the 51% formulation, at least for the time being.