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Friday, 10 February 2012 16:30
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Diluting equity in PSU banks is the only way forward

 

After berating credit rating agencies for daring to downgrade Indian banks and in one case even saying it was an ‘effort to destabilise our banking system’, the finance ministry appears to be getting real. A committee headed by finance secretary RS Gujral, FE reported Wednesday, has said that the government needs to infuse equity worth R35,000 crore each year in public sector banks for the next decade. Though the committee’s workings have not been made public as yet, it’s easy to calculate how it must have arrived at the capital needs. Indeed, if anything, the estimates seem a huge underestimate.

Just look at the level of bank lending today and increase that by 17-18% each year—the 21% growth of the last five years needs to be toned down given the slowing GDP growth, so let’s take a 17% annual growth. Apply a flat 8% capital adequacy figure to this and you come to a figure of R8 lakh crore that’s required. If you take a 9% capital adequacy, the number changes accordingly. Assuming the government owns at least 51% of PSU banks, that’s around R4 lakh crore which is required over the next five years. If the Gujral committee has got a lower figure, it could be due to lower growth estimates or a different combination of equity and debt that it uses to arrive at what banks need to beef up their capital adequacy by.

Having arrived at a figure, how does the government put this much aside for banks each year, particularly when the budget is as stretched as it is? The best alternative, as Yashwant Sinha realised when he was finance minister, is to dilute the government shareholding in PSU banks to 33%. As long as there are voting restrictions of the type in existence today, there is no danger of the banks being taken over. The question, however, is that though the NDA proposed this when it was in power, will it oppose such a move by the UPA.

 

 

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