Govt to infuse Rs 15,888 cr into banks

The government has earmarked Rs 15,888 crore for capital infusion into banks in the next financial year, considerably higher than what was allotted in the previous Budget. This apart, it’s planning to set up a financial holding company that will raise funds for public sector banks.

“For 2012-13, I propose to provide Rs 15,888 crore for capitalisation of public sector banks, regional rural banks and other financial institutions, including Nabard (National Bank for Agriculture and Rural Development),” Finance Minister Pranab Mukherjee said while presenting the Budget for 2012-13. “We are committed to protecting the financial health of public sector banks and financial institutions.”

Last year, the government had provided Rs 6,000 crore for public sector banks. However, according to the revised estimates, the total outgo would be more than three times of the initial estimate at Rs 19,540 crore.

The provision for higher capital comes after state-run banks gave their capital requirement plans for the next eight-10 years, after taking into account the capital requirement under the new Basel-III framework. The holding company structure, on the other hand, is in line with the government’s plan to maintain a minimum stake of 58 per cent in public sector banks. Otherwise, it may find it difficult to infuse large sums of money, as this would affect the country’s fiscal position.

The capital infusion would enable public sector banks to maintain a minimum Tier-I capital adequacy at eight per cent, and also meet their capital requirements in the coming financial year. The regulatory capital adequacy ratio (CAR) requirement is six per cent, with an overall CAR of nine per cent.

T M Bhasin, chairman and managing director of Indian Bank, said the fund allocated for state-owned banks would help them achieve the target of 18 per cent credit growth next financial year.

In 2011-12, government also roped in Life Insurance Corporation of India (LIC) to infuse capital into mid-size state-run lenders. A dozen state-owned banks like Punjab National Bank, Union Bank of India, Indian Overseas Bank and Bank of Baroda allotted shares to LIC. The largest institutional investor in the country, LIC, infused Rs 7,560 crore by subscribing to those shares. In total, taking LIC into account, Rs 27,100 crore was infused into 13 state-run banks.

According to sources, the funds would be raised by the holding company, which would be an investor in the bank. The government would continue to hold on to its control of the bank’s management, while inducting external capital into the holding company.

The government has 54-56 per cent in large banks like Bank of Baroda, Union Bank of India and Punjab National Bank. It would not be possible for the government to raise additional funds without diluting its stake.