PSBs to raise capital through preferential placement of equity

The finance ministry has decided to inject capital into state-run banks through equity, shelving for now plans to replenish their capital base through innovative instruments.

The ministry will go in for preferential placement of equity, the quickest mode of raising funds for cash-starved banks, a senior official said.

"Any of the new innovative methods would have required legislative changes, which are difficult in the current political environment," the official said requesting anonymity.

The ministry has committed to maintain a Tier-1 capital adequacy ratio of 8% in state-run banks and a holding of at least 58%. North Block, which houses the finance ministry, had been working on a long-term framework for bank capitalisation that envisaged use of shares with differential voting rights and warrants for cash infusion.

It was also considering a nonoperative holding company (NOHC) structure for state-run lenders. "NOHC structure may also not be viable as the dividend income from banks is found to insufficient to pay back the principal debt that such a company is expected to raise," the official said, adding that the idea is still being discussed.

The rationale behind this idea was that a holding company would raise debt from both domestic and foreign markets to capitalise banks. But the move has been suspended, at least for the ongoing fiscal, in view of the urgent fund requirement of a number of banks including the country's biggest lender State Bank of India, Bank of Baroda, Syndicate Bank and Union Bank of India.

The ministry had budgeted Rs 6,000 crore for bank capitalisation in the current year, but this allocation now seems insufficient to replenish capital depleted by credit growth and increased provisions for defaults on loans.

The Planning Commission has approved Rs 14,000 crore cash infusion this year, but the finance ministry has not yet mentioned extra infusion in the supplementary demands. The ministry, which had been considering the warrants route for equity infusion in SBI, is now expected to give it about Rs 10,000 crore directly.

Financial Services Secretary DK Mittal had said recently that state-run banks would require Rs 3.5 lakh crore over the next 10 years. A committee headed by Finance Secretary RS Gujaral has been tasked with working out a strategy for capitalisation of public sector banks through 2021. The ministry has also told banks that the capital support they get from the government would be linked to their financial and functional efficiency.

Source: www.economictimes.com

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