In a major initiative, the Cabinet on Wednesday gave its approval for public sector banks to raise capital by diluting government holdings up to 52%, to meet their additional capital requirements.
Banks need capital to meet stringent international standards, also known as Basel III norms, which will become applicable by March 31, 2019.
The exercise would be done in a phased manner through the issue of shares, largely to retail investors.
If state-owned banks are allowed to bring down government holdings to 52% in stages, they would be able to raise up to Rs 1,60,825 crore, a statement said.
Banks require an estimated Rs 2,40,000 crore as equity by 2018 to adhere to the Basel III norms.
The government has provided Rs 11,200 crore for recapitalisation of public sector banks in 2014-15.
“It is a welcome step as banks need capital infusion to continue with the expansion process and meet credit demands” a bank chairman who did not wish to be identified told HT.
With the level of non-performing assets (NPAs) rising for banks, the capital adequacy ratio — the ratio of a bank’s capital to its risk and a measure of how much loss it can absorb — has been declining.
NPAs or loans that do not yield returns have risen to Rs 2.6 lakh crore in 2013-14, raising concerns about banks’ ability to keep the credit tap flowing to aid economic revival.
The total support provided to government banks towards the capitalisation exercise during the last four years was Rs 58,634 crore. The total market value of government shareholding in state-owned banks stood at more than Rs 4 lakh crore.
Out of 27 state-owned banks, the government controls 22 through majority holding, an official statement said. In the remaining five banks, State Bank of India holds majority stakes.
Sources said banks would have to come up with their own proposals to carry out this fund-raising exercise. Besides, hiving off of non-core businesses is another option that is being considered.