Govt eyes 3 options for bank funding

NEW DELHI: Finance minister Pranab Mukherjee will have to make a tough choice over the next few days on bolstering the capital base of public sector banks. A committee headed by finance secretary Raminder Singh Gujral has narrowed down on three options to provide equity to state-owned banks to help them expand their businesses and comply with the new capital requirements. The first option is to directly provide equity into these banks, something that the government is already doing despite the pressure on its fiscal situation. The second option is to cut government holding in these banks to under 51%, a proposal that was mooted by the Atal Bihari Vajpayee government but was not cleared by the Parliamentary Standing Committee. In fact, UPA has repeatedly said that it is not going to dilute the public sector character of banks such as SBI and Punjab National Bank and has provided capital. In fact, the Cabinet has mandated that the government should hold at least 58% in public sector banks that control 70% of the market. The third option is to create a holding company which will own shares in the public sector banks. The holding company option, which was reported by TOI on September 30, has been discussed in the past but has not been approved. Under this model, a new company would be set up, which will hold stake on behalf of the government in public sector banks. The move will help the government rein in its spending as the holding company will do the fund-raising. Sources said subsequently, the law will be amended to allow banks to use innovative instruments such as shares with differential voting rights, a proposal first mooted by SBI in 2007. This will help banks access capital and yet not put pressure on government finances. While the government has already provided over Rs 30,000 crore to public sector banks over the last three years, faster economic growth is putting pressure on banks to provide more loans to companies and individuals. With the law barring government from lowering its stake below 51%, the lenders find it tough to raise funds through issue of fresh shares as it would result in dilution of the Centre's shareholding. Over the last few years, new tools such as issue of preference shares, perpetual equity and rights issue have been used to provide equity to public sector banks. As part of the assessment being done for the next decade, banks have demanded fund infusion of around Rs 4 lakh crore.