Centre revives plan to float holding company for state-owned banks

The Narendra Modi government has, in its second tenure, revived its plan to float a holding company that will house equity stakes of public sector banks (PSBs).

This proposal seeks to improve human resource practices and raise funds to meet the financial needs of 19 PSBs.

The Prime Minister’s Office (PMO), in recent meetings with finance ministry officials, told them to examine the proposal on the lines of recommendations made by a committee headed by veteran banker P J Nayak in 2014, said two people familiar with the development.

At the same time, the government is also studying whether it can offload stake in some “weak” PSBs, in order to attract private sector players to help improve their financial health, said one of the two people cited above.

However, the department of financial services, which falls under the finance ministry, has shown reluctance to the idea and sought more time to “study” the proposal in detail, the person said.

The P J Nayak committee had suggested forming a bank investment company (BIC) to hold equity stakes in PSBs. It had recommended transferring stakes in a phased manner to the BIC, which would be constituted as a core investment company under RBI regulations but would have the characteristics of a sovereign wealth fund for PSBs.

“A non-operational holding company — a model that has the approval of the RBI — for PSBs can aid recapitalisation to a certain extent. The revenue stream for the holding company could be dividends and periodic sale of equity,” said Ashvin Parekh, managing partner of Ashvin Parekh Advisory Services. He, however, added that a good pre-requisite would be to ensure the company has a professionally-run board of directors.

The panel had suggested setting up the BIC under the Companies Act, repealing  laws under which PSBs were constituted and transfering power through “a suitable shareholder agreement and relevant memorandum and articles of association”. Therefore, a holding company for transferring stakes of PSBs would require legislative changes.

What's the need

• PSBs have been recapitalised by Rs 3.19 trillion — Rs 2.5 trillion capital infusion and Rs 66,000 crore through fundraising — in last five financial years

• These banks are grappling with capital constraints; once RBI's new accounting norms are implemented, their capital needs may rise up to 30%

• Number of PSBs has gone down to 19 from 27 in March 2017 because of consolidation

• A holding company will transfer all equity holding by government and allow it to raise long-term debt from domestic and international markets for PSBs