PSU banks' demand over the top: Govt

Against demand of Rs 40,000 crore, likely funding at Rs 14,000 cr only.

The government has said that public sector banks have asked for much more capital than it can give.

All state-run banks put, including IDBI and State Bank of India’s associates, have sought Rs 40,000 crore from the government to expand credit over the next three years.

However, the government can extend support only to the extent of Rs 14,000 crore ($3 billion), being provided by the World Bank. The Bank has agreed to give a $2-billion loan to the government to help public sector banks expand credit and maintain a healthy capital adequacy ratio (CAR). A second loan, about $1 billion, is likely to be extended by June 2010.

State Bank of India had sought Rs 20,000 crore from the government, its chairman OP Bhatt had said a few months ago, a proposal that did not find favour with the finance ministry as the country's largest bank had been provided a budgetary support of Rs 10,000 crore in March 2008 at the time of the rights issue.

For public sector banks, the government has prescribed a CAR of least 12 per cent, 300 basis points above than is mandated by Basel-II norms.

All public sector banks have more than the prescribed level of capital adequacy but the government decided to step in as the banks have lined up massive expansion plans. With the law barring the Centre from reducing its stake below 51 per cent, raising capital could be a problem.

“All the banks have sent us proposals. Their demand is about Rs 40,000 crore, but at the moment we do not have more than Rs 10,000 crore (which is the $2 billion budgetary support from the World Bank). It will go up when another $1 billion comes, but even then we will have to prune it ... We are examining whether their demands are genuine,” a finance ministry official told Business Standard.

The official said the government had already asked the banks the kind of expansion and growth they were envisaging in business, credit and deposits, and accordingly decide how much they required.

Capital infusion will primarily help banks in which the government holding is close to the minimum 51 per cent and so do not have the option to raise funds from the capital markets.

Injection of capital would raise the government’s stake, providing these banks more headroom to raise capital by diluting stakes. Oriental Bank of Commerce, Dena Bank, Andhra Bank, Bank of Baroda, IDBI Bank and Vijaya Bank have less than 55 per cent government equity.

The World Bank loan came after the government estimated that the country’s public sector banks would require at least $4.8 billion during 2009-11 to maintain credit expansion over the medium term, subject to change in financial market conditions and the rate of economic growth.

The Union Cabinet had in February 2009 approved infusion of Rs 3,800 crore of capital into Central Bank of India (Rs 1,400 crore), UCO Bank (Rs 1,200 crore) and Vijaya Bank (Rs 1,200 crore).