The finance ministry intends to move the cabinet in two or three weeks with a proposal for a holding company to enable public sector banks (PSBs) to raise capital from the market, instead of these lenders looking to the government for capital infusion.
A senior official said the holding company was likely to be set up by June. He said the law ministry's opinion had been sought on making the needed legislative changes, as various lws would have to be synchronised and amendments would be required in the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and 1980. Besides, State Bank of India Act, 1955, and SBI Subsidiaries Act, 1959, will have to be synchronised with the holding company structure.
"The law ministry has to vet the proposal first. Then it will go to the cabinet," the official said. According to the proposal, 99 per cent of government stake in a PSB will be shifted to the holding company; the state will retain one per cent. “Initially, the holding company will be only for banks but other financial institutions can join later,” he said.
The ministry has estimated it would need to infuse Rs 20,000 crore in PSBs next year, against Rs 12,517 crore this year. The proposed holding company can raise money from the markets, in which case the government would not need to dig into its budgetary resources.
The official said the government would initially put some capital in the company from budgetary resources but it could later get dividend income, as well as tap the markets.
In Budget 2012-13, the government had proposed to create a financial holding company. The finance ministry sent the guidelines for setting up one to the Reserve Bank of India (RBI) some time earlier but the central bank had reservations on some points. It wanted the guidelines for regulating a holding company be first put in place.
The holding company is likely to be a statutory body, to be set up under an Act of Parliament. It will be able to raise money globally. The concept of a bank holding company is prevalent in many countries such as the US, China and Canada. The private sector also uses holding companies for acquisitions.
This year, around 10 PSBs are to get a total capital infusion of Rs 12,517 crore from the government before this financial year ends. Last week, the cabinet had given in-principle approval for providing need-based recapitalisation of banks till 2018-19, for ensuring compliance with the stiffer Basel-III capital adequacy norms.
