This refers to T N Ninan's article "Banking on non-solutions" (July 18). There's no doubt that stifling debt loads continue to weigh on government and central banks around the world. In India, even though private banks are in much better shape, the asset quality of some of the government-run banks causes concern.
According to a statement by Finance Minister Arun Jaitley, public sector banks would require about Rs 2.4 lakh crore capital by 2018 to meet global Basel III capital adequacy norms. Even though most of them are adequately capitalised at present, considering their increasing non-performing assets and future growth, they will need additional funding to lend more. The government has two options - either raise funds from the markets by diluting government holding or infuse capital by using taxpayers' money. But looking at the current market price, most of these banks are trading at huge discounts to their book value, and any stake sale at this level would be at a distressed valuation. Hence the decision to go ahead with a comprehensive package rather than a stake sale is a good call.
Moreover, with the amount of funds that these banks will require, at some point they will have to look to the market to raise more capital. It is better that the government infuses capital at this stage as this will give it more headroom to raise capital from the market later on.
If the government can reform these public sector banks and turn them into professionally-run organisations on par with their private sector peers, it might help close their valuation gap with the latter. This, in turn, will mean a better deal for the government.
Nilabh Mahanta New Delhi
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