Money & Banking

Why the Govt owning 90% of many PSBs is a problem

Radhika Merwin BL Research Bureau | Updated on September 11, 2019

The huge holdings may limit its ability to infuse more capital into public sector banks

The Centre’s holdings in public sector banks have seen a steep ₹1.6 lakh crore erosion in value over the past five years, even as it pumped in a massive ₹2.5 lakh crore of capital into these banks. But aside from costing the Centre dearly, the huge capital infusion has also led to a peculiar situation.

Over the past five years, the stake of the government in many PSBs has shot up from 60-70 per cent to over 90 per cent.

Year after year, the government has been issuing shares in PSBs, in lieu of the capital it has been infusing. This has led to a sharp rise in its holdings in these banks. Much of the sharp rise in government holdings has happened in the last two years, thanks to the humongous infusion of ₹1.96 lakh crore in 2017-18 and 2018-19 alone.

For instance, the government’s holdings in Corporation Bank stood at 63.3 per cent in 2014-15. This has shot up to 93.5 per cent as of March 2019, with the Centre pumping in little over ₹15,000 crore into the bank over the past five years. The current market capitalisation of the bank is about ₹10,100 crore.

In the case of United Bank of India, the government’s stake has gone up to 96.8 per cent from 82 per cent five years ago. The government has pumped in around ₹9,100 crore into the bank since 2014-15. In Oriental Bank of Commerce, the government has infused ₹10,500 crore over the last five fiscals, and its stake has shot up from 59 per cent to 87.5 per cent during this period.

Similarly in Andhra Bank, the government’s holding has moved up to 90.8 per cent in the 2019 fiscal from 61 per cent in March 2015.

Capping further infusion

One key fallout of the government’s high stakes in these banks is the restriction it puts on further capital infusion. With the Centre’s stake in many of the PSBs at near 90 per cent and over, pumping in huge amount of money in future would be difficult.

Interestingly, many of the PSBs that have very high government holding are among the Centre’s big bank merger candidates announced recently. For instance, OBC and United Bank are set to merge with Punjab National Bank. Andhra Bank and Corporation Bank are proposed to be merged with Union Bank.

The merger, it would appear, has eased the predicament of the government for now. But given that its stake in the proposed merged entities could still be 80-85 per cent (depending on the swap ratio), the Centre may be faced with a similar problem in future. In the recent merger announcement, the Centre has proposed to infuse ₹16,000 crore into PNB and ₹11,700 crore into Union Bank.

Published on September 10, 2019

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