With the ongoing pandemic throwing up huge challenges for the already ailing banking sector, the issue of capital scarcity has yet again come under focus. For public sector banks (PSBs) that have been relying solely on the government — the largest shareholder — to bail them out in recent years, the government’s sizeable holdings presents an additional predicament.

Sample this, of the 12 PSBs (after the four mergers), the government holds 92-96 per cent in four of them and 83-89 per cent in five. The sharp rise in the government’s holding in PSBs over the past three years has been thanks to the massive ₹2.6-lakh crore of capital infusion through the recapitalisation bonds. Not only has the huge capital infusion failed to strengthen banks’ balance sheets, it now presents a peculiar dilemma for the Centre to infuse further capital. With the government’s stake in many of the PSBs at near 90 per cent and over, pumping in huge amount of capital could be difficult.

The pandemic-led slowdown that is expected to weigh on the banking sector heavily owing to the steep rise in bad loans and provisions, would require banks to raise additional capital in the current year. Workings suggest that PSBs would require at least ₹1 lakh crore of recapitalisation in FY21.

Sharp rise in holdings

Barring SBI, all PSBs have seen a sharp rise in government stake since FY17. For instance, the government held about 80 per cent in IOB in FY17. It now (as of June) holds nearly 96 per cent in the PSB, after infusing around ₹18,800 crore into the bank over the past three years. In the crisis-hit PNB, the Centre has infused a mind-boggling ₹35,700 crore over the past three years. The government stake in the bank is about 86 per cent as of June, up from 65 per cent in FY17. UCO Bank (94 per cent holding currently), Central Bank of India (92 per cent), Bank of Maharashtra (92 per cent), Bank of India (89 per cent) and Union Bank (89 per cent) are other PSBs where the government holding is very high.

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Interestingly, the Centre’s move to fold ten PSBs into four, has not eased the issue of high government stakes. Last year, the government proposed four bank mergers — Oriental Bank of Commerce and United Bank with Punjab National Bank, Syndicate Bank into Canara Bank, Allahabad Bank with Indian Bank and Corporation Bank and Andhra Bank with Union Bank. These mergers came into effect from April this year. The shareholding pattern as of June suggests that even in the four merged banks (PNB, Canara Bank, Indian Bank and Union Bank), the government holds 80 per cent and over. Given that the capital requirement for these colossal institutions will be substantial, the high government stake can impede further capital infusion.

Six PSBs were kept outside the Centre’s merger exercise last year — Bank of India, Central Bank of India, IOB, UCO, Bank of Maharashtra and Punjab and Sind Bank. High NPAs (16-20 per cent of loans in most of them) and weak financials of these banks remain a concern and capital infusion into these banks will be critical in the current fiscal.

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