Why Should Govt Inject Fund In PS Banks?

Why should government fund PSUbanks all the time?-By A K Das
Money Life 

At least some of the PSU banks cannot claim to be cash-strapped, especially looking at their cash reserves. By capitalising their reserves instead of seeking fund from the government, they would be rewarding their share holders as well

Press reports indicate that some of the public sector banks (PSBs) are seeking more capital ahead of the budget, which is scheduled to be presented by the second week of July. According to these reports, cash-strapped public sector banks "hit by a higher proportion of stressed assets and global Basel III requirements" have begun listing out capitalrequirements ahead of the budget in July.

In the interim budget, the Congress-led United Progressive Alliance (UPA) government had earmarked Rs11,200 crore as capital for all public sector banks. In 2012-13, the government had, in fact put in Rs14,000 crore. This kind of funding must stop, and thebanks need to be able to generate their required funds from investing public.

Since the last couple of months, all leading newspapers have carried details of the balance sheet of a large number of organisations, including pubic sector banks. The following information has been collected from these announcements:

Name of Bank	Paid up Capital (Rs crore)	Reserves (Rs crore)
Allahabad Bank	544.61	10644.56
Bank of Baroda	430.68	36349.21
Bank of India	643	24629.95
Bank of Maharashtra	839.1	4917.02
Canara Bank	461.26	23660.6
Corporation Bank	167.54	9952.37
I D B I	16.03	202.93
Karnataka Bank	188.42	2863.78
State Bank of India	746.57	146623.96
Syndicate Bank	624.58	11387.25
UCO Bank	1014.71	9624.18
Union Bank	630.31	16544.67

From the above, most of the banks mentioned appear to have healthy cash reserves. If and when they need funds, they should be able to raise it from the investing public either by rights issue or even by capitalising their reserves.

However, in the present situation, specific amounts of assistance appears to have been sought from the government by IDBI and Indian Overseas Bank, and it is likely that some more may join the band wagon to seek capital infusion.

As mentioned above, at least some of the banks cannot claim to be cash-strapped! By capitalising their reserves, they would be rewarding the share holders too.

In the meantime, it is being reported in the press that GS Sandhu, secretary for financial services, has underlined the need for banks to sell off their non-core assets. The companies identified as non-core include rating agencies such as ICRA, CARE, National Stock Exchange (NSE), IL&FS, UTI, Multi-Commodity Exchange (MCX), Stock Holding Corp of India Ltd (SCHIL), Central Depository Services (India) Ltd (CDSL), and asset reconstruction corporations (ARCs). The estimated value of these assets would be around Rs25,000 crore.

As we can see from the details given above, the reserves are huge, compared with the paid up capital of these state-rund lenders. It is pay back time for these banks. Why not buy out the government share in line with the established formula for this purpose and reduce the government holdings?

Years ago, the Atal Bihari Vajpayee government had suggested that the Centre could reduce its stake in public sector banks to 33% but the move did not go through as the law could not be amended. Now this can easily be achieved and Vajpayee's proposal could be implemented!

After doing this, should the banks need any additional capital infusion, they ought to go to the shareholders instead of going back and forth to cash rich Life Insurance Corp of India (LIC) and other similar institutions, which only means that the Government stake would keep rising, instead of being held by the investing public.

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)

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