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C. Shivkumar

Bangalore, June 29 Public sector bank (PSB) chiefs have expressed reservations about divestment in the banking sector to meet the government’s fiscal consolidation objectives.

Top PSB officials, who declined to be named, said, “We are not opposed to divestments; after all, the government is the owner of the banks. But what is in it for us?”

Barring a few banks, the government holding in most PSBs is already down to the threshold level of 51 per cent. In some large banks the government holding is high — Canara Bank (73 per cent), Indian Bank (80 per cent), Central Bank (75 per cent) and UCO Bank (75 pe cent). The bank officials said capital constraint was among the major problems faced by the sector.

Although, most banks appear to be well capitalised, requirements are likely to mount if the credit offtake picks up in the peak season. Currently, most PSBs are well over the threshold level of 12 per cent capital-to-risk weighted asset ratio prescribed by the Finance Ministry. Regulatory capital as mandated by the Reserve Bank of India, however, is currently lower at 9 per cent with six per cent in the form of Tier-I capital (net owned funds).

Besides, banks that had already reached 51 per cent were not in a position to raise equity resources from the market. Any further raising of paid-up equity through the market was likely to further dilute government holding. Moreover, some PSBs are already close to exhausting their 15 per cent limit for the Innovative Perpetual Debt Instruments. IPDI is treated as part of Tier-I capital.

After the financial sector meltdown last year, banks have taken advantage of this route to capitalise themselves through issue of perpetual instruments and through Tier-II debt issues. Since the beginning of this financial year, of the Rs 31,000 crore of bonds floated, at least 40 per cent of the issues were of capital bonds by banks.

But the flexibility for both IPDI and Tier- II bonds routes has shrunk, officials said. Consequently, the banks might prefer the government providing additional equity capital, instead of divesting. This would help them leverage the IPDI and subordinated debt routes for additional resources.

None of the PSBs seems willing to compromise on the net interest margins (NIM) of 3 per cent, despite the push by the Finance Ministry to lower NIMs closer to private sector bank levels. The bank officials said the high NIMs were required partly to buttress their capital and strengthen the net owned funds. This, in turn, allowed them to leverage for both Tier-I capital through perpetual bonds, and Tier-II capital. The officials said, “If government is not prepared to put in capital, what else do we do?”

More Stories on : Public Sector Banks | Outlook

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