HEADLINES:
October 16 2019
SBI set to get 6,000 crore from govt
28 December 2011

 The government is set to provide around Rs 6,000 crore to State Bank of India, the country's largest lender, as part of a Rs 16,000-17,000 crore equity infusion plan in public sector banks during the current financial year. 

Sources said the finance ministry sent letters to public sector banks earlier this week to be prepared for receiving equity over the next few months although a formal announcement will be made in the Budget. 

The move will help bolster the equity base of at least half-a-dozen banks, including Bank of India,Union Bank of IndiaSyndicate Bank and Bank of Baroda (BoB). On Wednesday, BoB informed stock exchanges that its shareholders have approved capital infusion by the government. 

Sources said that banks will make preferential allotment of shares to the government, which will result in not only the paid-up capital rising but even the Centre's shareholding going up to at least 58% in all banks. Three years ago, at the height of the financial crisis had decided to infuse funds into state-owned banks to ensure that it holds a minimum 58% stake and Tier-I capital adequacy ratio is above 8%. 

The move is of particular interest to SBI, which recently saw its credit rating downgraded by Moody's to D+ on the grounds that the bank's capital situation will come under pressure due to rising bad debt. At the end of September, SBI's Tier-I capital adequacy ratio was at 7.47% - lower than the government's comfort level but well above RBI-mandated 6%. 

Although the tool chosen by the government to provide funds is not in line with the SBI management's demand that the government subscribe to the bank's Rs 20,000 crore rights issue, the move will actually benefit the country's largest lender as the process is shorter. Besides, it gives the bank as well as the government leeway in future fund raising as the Centre can dilute stake through a follow-on issue. A preferential allotment will result in direct cash infusion instead of the earlier system where bonds were issued, something that RBI was not very comfortable with. Around four years ago, the government had provided Rs 12,000 crore to SBI as part of its Rs 20,000 crore rights issue. The government has a 59.4% stake in the bank and this is going to go up once fresh equity is made available. 

The department of financial services has been pushing for capital infusion in public sector banks for the last few months and now even the department of economic affairs (DEA) has agreed. Earlier, DEA was resisting the move citing fiscal implications but looking at the urgency of the situation it has agreed to the proposal.


 

 

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