Banks to take holding company route to raise capital

To raise additional capital, public sector banks will soon be allowed to set up a holding company. Also, banks have been permitted to issue shares to employees.

Public sector banks need around ₹40,000 crore in 2014-15 to meet Basel-III norm requirements and expand business. In the Interim Budget, the Government provided ₹11,200 crore as capital infusion, and it now expected that an additional amount of up to ₹8,000 crore is likely to be provided.

According to the Reserve Bank of India, banks will require additional capital of ₹5 lakh crore over the years to meet the new global banking norms – Basel III. However, the Finance Ministry has clarified that since the Government has limitations in infusing capital, banks will have to use various options to raise capital.

“The proposed holding company will have shares all the subsidiaries and can go to market and raise funds,” Financial Services Secretary GS Sandhu told reporters after annual review meeting of public sector banks. However, he said in any situation, the Government’s holding in the bank will not go below 51 per cent. The State Bank of India could be the first bank to set up such a holding company.

RBI is agreeable to the proposal, while SEBI’s approval is awaited. Once all regulatory approvals are in place, a decision will be taken on each bank separately, Sandhu said. He said a proposal related to an umbrella holding company for all the public sector banks had been dropped.

In the meeting, banks also proposed setting up a special purpose vehicle (SPV) for taking over all real estate assets of banks. The SPV will issue bonds to mobilise funds for banks, which in turn will pay rent to the SPV that can be used to pay interest to bondholders.

However, the Secretary clarified that this was just one suggestion and no formal decision had been taken yet.

Terming rising bad loans as a major concern for the Government and banks, Sandhu issued a stern warning to wilful defaulters.

“There will be tough action against wilful defaulters, which can even include change of management because so much money is stuck,” he said, adding that banks have to provide huge amounts in terms of provisioning (about ₹90,000 crore was going into provisioning).

“So, we want to recover that. If the original borrower does not come up with some option of repayment, we will call some other person, and if he is able to provide that, then assets could be handed over,” the Secretary said.

At the end of March 2014, public sector banks’ gross non-performing assets (GNPAs) stood at 4.44 per cent.

Though it has improved from 5.07 per cent in December 2013, it is still at a nine-year high.

Sandhu said infrastructure, textiles, iron and steel, mining and aviation were the five sectors that accounted for almost 23-24 per cent of bank advances. Public sector banks alone have a share of 85-90 per cent total loans. The stress accounts are 55 per cent in these five sectors, he said, adding that these include NPAs and restructured accounts.

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