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Government to reduce stake in public sector banks

Feb 4, 2000

The government is planning on reducing its stake in strong public sector banks to 49%, with a view to bringing the stake down to 26% later on. The definition of a "strong bank" is a three-year continuous profit record and a single digit net non-performing asset (NPA) level. This move by the government is being taken to provide greater autonomy to the public sector banks as it does not want to continue the recapitalisation of banks. This is due to the weak fiscal position of the government and constraints on its budget allocations.

For the weak PSU banks it has decided to set aside funds in the 2000 Budget for a financial recast and the revival plans for these banks include a voluntary retirement scheme and the formation of an asset reconstruction company.

In a meeting last month the government urged the banks and financial institutions to look for sources of capital on their own as the government has constraints for further funding.

This step would eventually lead to privatisation of the public sector banks. However the hitches will be many and it will not be as simple as it is on paper to implement this. This is because the public sector banks are overstaffed, they have very strong unions, they have low levels of computerisation, high NPA's and they are not very efficient as operating expenses as compared to private sector banks are high.

Lacking of funding from the government will lead many public sector banks to the market as they need to raise capital to meet their capital adequacy requirements as stipulated by the RBI. They need to have a capital adequacy ratio of 9% by March'2000 and take this upto 10% by March 2002. Also they need to provide for the decline in capital due to writing off of bad and doubtful debts. However for these banks to access the capital markets, they will need to restructure their balance sheets to make them stronger and improve upon their inefficiencies.

This is in line with the Narasimhan Committee report that suggested the reduction of government holding in the public sector banks (PSBs) to below 51%. This stance by the government can be seen as a positive as public sector banks have been enjoying subsidies for years which have been financed by the tax payers earnings. Now they will have to become more efficient and operate in a banking environment that encourages fair competition. This is necessary for a developing country like India.

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