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PSU Banks to tap the markets to reduce government stake - Views on News from Equitymaster
 
 
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  • Mar 2, 2000

    PSU Banks to tap the markets to reduce government stake

    Five public sector banks State Bank of India, Corporation Bank, Bank of Baroda, Oriental Bank of Commerce and Punjab National Bank are likely to issue fresh equity to reduce the government's stake. This is a result of the recent budget announcements of reducing the government's holding in nationalised banks to 33%.

    The first phase of the government's divestment in public sector banks would be by these profit making PSU banks who would tap the markets with issues. The government's holding in SBI is currently 60% and for this stake to fall below 55% the SBI Act would first have to be changed. The government's stake in Bank of Baroda stands at 68%, Corporation Bank at 66% and Oriental Bank of Commerce at 66%. As for Punjab National Bank (PNB) where the government's holding currently stands at 100% they would have to come out with a maiden public issue to reduce this stake. PNB has been planning on tapping the capital markets for a while, however this had been postponed due to changes in its board.

    According to a news article SBI is keen to reduce its stake to the minimum level at one go, as it would not like to tap the capital markets time and again. To spruce up its capital adequacy ratio SBI was earlier planning on coming out with a Rs 30 bn to Rs 40 bn issue, however with the recent budget announcements it will probably come out with an issue of a higher amount. It could well tap the international capital markets too for this purpose.

    The five nationalised banks capital adequacy ratios as of March'99 are as follows and they need to maintain this at 10% by March'2002 as per the Narasimhan committee recommendations.

    Hence in order to expand over the next two years, they need to increase the capital adequacy ratios. With the government not keen to increase their funding in these banks, the capital market will become the source for these banks to access funds and maintain the capital adequacy ratios. It is an important move for banks as they were earlier constrained from raising funds from the capital markets. However with the Union Budget now reducing the requirement of minimum government shareholding in any nationalised bank to 33%, they are able to go ahead with their issues.

    This would provide greater autonomy for banks in the long term, however as their PSU status will continue these banks will be burdened by problems related to PSUs like large number of employees, high operational costs and hence will not be able to compete on a level playing field with private sector banks.

     

     

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