If the government’s stake in public sector banks drops below 51 per cent then foreign creditors of these banks may either re-negotiate the loans or call them back, according to IDBI Executive Director & Head – Treasury, NS Venkatesh.
Incorporated covenantWhen public sector banks raise foreign currency resources, there is a covenant incorporated in the loan agreement that the government’s stake in the banks should not fall below 51 per cent. If this happens then the terms of the loan agreement get altered.
Speaking at a State Bank Banking and Economics Conclave in Mumbai, Venkatesh said the authorities should be mindful of the abovementioned covenant before taking a decision on implementing the RBI-appointed PJ Nayak Committee’s recommendations.
Among the recommendations of the Nayak Committee, which reviewed governance of the boards of banks in India, is that the government should set up a Bank Investment Company (BIC) to warehouse its equity stakes in public sector banks.
The committee said the BIC could reduce its holding in banks to less than 50 per cent so that there is a restoration of a level-playing field for public sector banks in matters of vigilance enforcement, employee compensation and applicability of the right to information.
Bankers say that if the foreign currency loans given to public sector banks by foreign creditors are recalled due to the government stake falling below 51 per cent, it could have a negative impact on the domestic currency.
Ananth Narayan, Regional Head, Financial Markets, South Asia, Standard Chartered Bank, said the Government should incentivise investment in infrastructure over consumption.
The foreign investment limit in low-yielding government securities should be increased even as domestic investors are offered higher returns on their investments in infrastructure bonds, he added.