The government has approved a decision to allow public sector banks to raise up to Rs 1.60 lakh crore or about $26.5 billion from capital markets by diluting government holding to 52 per cent in phases so as to meet Basel III capital adequacy norms.
"The quantum of capital support needed by banks is huge, which cannot be funded by budgetary support alone," an official statement said, detailing the decision taken by the Cabinet, headed by Prime Minister Narendra Modi.
The Cabinet has asked the PSBs to broadbase retail shareholding when they hot the capital markets for fundraising.
Out of 27 PSBs, Government of India controls 22 through majority holding. In the remaining 5 banks, state-run SBI holds majority stake.
"If the PSBs are permitted to bring down Government holding to 52 per cent in a phased manner, they can raise up to Rs 1,60,825 crore from the market," it said.
The Basel III norms, which will come into effect from March 31, 2019, were put in place following the 2007-08 financial crisis triggered by the fall of Lehman Brothers.
The norms are aimed at improving risk management and governance while raising the banking sector's ability to absorb financial and economic stress.
As per Basel-Ill norms, the minimum Tier-1 has to be 7 per cent.
The total support provided to PSBs towards capitalisation during the past four years was Rs 58,634 crore, the statement said, adding the provision for the current year is at Rs 11,200 crore.
The total market cap of Government shareholding as on May 2014, stands at over Rs 4.19 lakh crore.
There are over two dozen PSBs and government holding in them is between 56.26 per cent to 88.63 per cent.
Public sector banks require equity capital of Rs 2.4 lakh crore by 2018 to meet Basel III norms.
GoI budgetary support needed for 2015-19 would be Rs 78,895 crore, which will maintain government holding at 52 per cent, the statement said.
However, as Government is likely to receive an amount of Rs 34,500 crore from PSBs as dividend, the net outgo will only be Rs 44,395 crore, it added.
"Going by past trends if we take average Gross Domestic Product (GDP) growth rate for the next five years as 6.5 percent and dividend pay-out ratio as 20 per cent as percentage of net profit or 0.80 of risk weighted assets (RWAs) and credit growth rate at 18 per cent and further RWAs growth at 16 per cent, the total capital would be over Rs 4.60 lakh crore," the statement said.
(With inputs from PTI)