Public sector banks, which comprise two thirds of the banking system, have been given a capital infusion of Rs 14,000 in Budget 2013/14. This is slightly less than the Rs 20,000 crore bankers were expecting, to help them meet the stringent Basel-III norms, which require higher capital. Banks already face an additional burden because of higher provisioning requirements, due to an increase in non-performing assets (NPAs). Many of them are badly hit with gross NPAs of over five to six per cent. Cases of corporate debt restructuring are also on the rise.
Last year, the government pumped in close to Rs 13,000 crore in a dozen banks. A high level committee to assess the capitalisation of public sector banks in the next 10 years had suggested setting up a non-operating holding company for them. Former finance minister - and now President - Pranab Mukherjee had also mentioned it in earlier Budgets. But there was no word in this Budget about any such financial holding company structure to raise capital.
Given the current environment with gross domestic product growth slowing to 5-5.5 per cent, it will be very difficult for the government to infuse huge sums into public sector banks. According to an estimate, the government has to pump in some Rs 90,000 crore over the next five years to maintain its majority stake in these banks. The government is very clear about not lowering its stake below 51 per cent in any of the public sector banks.
A decade ago, Finance Minister Yashwant Sinha had suggested bringing the government holding in public sector banks down to 33 per cent , but it didn't happen. The other proxy window available to the government to keep a control on banks is the Life Insurance Corporation (LIC) route, getting the LIC, which is flush with funds, to increase its stake in banks. The country's biggest life insurer has equity holding in many banks. The government has been doing this in the past.