Plan panel wants Govt to cut stake in PSU banks to below 51%

The Planning Commission has advocated dilution of Government equity in public sector banks to below 51 per cent. If this happens, these banks will no longer be Government owned.

The Draft Approach Paper for 12th Five-year Plan reads, “If Government ownership of equity in public sector banks cannot be diluted below 51 per cent, there is no alternative to providing budget resources to build up the capital of the public sector banks.”

According to the paper, the public sector banking system needs to achieve economies of scale through both capital infusion and consolidation. During 2010-11, the Government infused Rs 20,157 crore in public sector banks. This was done to maintain tier-I Capital to Risk Weighted Asset Ratio (CRAR) at 8 per cent and increase Government equity in some banks to 58 per cent.

For the current fiscal, too, the Government has allocated Rs 6,000 crore to enable these banks to maintain a minimum tier-I CRAR at 8 per cent.

According to an Ernst & Young report, ‘Balancing Growth and Capital Requirement', given that the credit offtake is sustained at the current level along with similar profitability and asset profile, the Indian banking sector is likely to require significant capital infusion by 2015. Individual banks may even require capital infusion as early as 2013.

The report, which has done an impact assessment of Basel-III, found that 24 public sector banks might together face a capital shortfall of Rs 1,071.59 billion by 2015. The report said that consolidation in public sector banking space might address the problem of shortfall of capital.

To make the banking system more competitive and strong, Basel III norms are to be implemented from 2013. Full implementation is expected in five to 10 years. According to the Reserve Bank of India, under Basel III, banks would be required to maintain CRAR at 10.5 per cent, of which tier-1 would be 8.5 per cent and common equity 7 per cent.

Basel III norms also propose building counter-cyclical and additional capital buffers. Building such capital, according to new international standards, would involve additional costs for Indian banks.

Indian Bank -80%, UCO Bank -68.13%,Canara Bank-67.72%......

Shishir.s@thehindu.co.in

SOURCE: http://www.thehindubusinessline.com/industry-and-economy/article2389355.ece