The Union Cabinet chaired by the Prime Minister, Shri Narendra Modi, gave its approval for allowing Public Sector Banks (PSBs) to raise capital to meet their additional capital requirements under BASEL-III by diluting Government holding upto 52 percent in a phased manner.

Out of 27 PSBs, Government of India controls 22 through majority holding. In the remaining 5 banks, SBI holds majority stake. These 27 PSBs control 70 percent of total branches, deposits and credit in the Indian banking system. Gol has regularly been infusing incremental capital in PSBs.

Basel-Ill capital adequacy norms will be fully phased in and applicable by 31.3.2019. Capital requirements of banks have increased under Basel-Ill.

As per Basel-Ill norms the minimum Tier-1 has to be 7 percent. In addition, Banks require another 2.5 percent of Common Equity as Capital Conservation Buffer. In all, Banks need a total of 9.5 percent. The quantum of capital support needed by banks is huge, which cannot be funded by budgetary support alone. The main concern of Gol primarily pertains to Common Equity Tier-I capital of 5.5 percent.

Going by past trends if we take average Gross Domestic Product (GDP) growth rate for the next five years as 6.5 percent and dividend pay-out ratio as 20 percent as percentage of net profit or 0.80 of risk weighted assets and credit growth rate at 18 percent and further RWAs growth at 16 percent, the total capital would be ₹ 4,60,120 crore (Rs.2,39,720 crore Common Equity Tier-I) (Rs. 1,55,900 crore Additional Tier-I) and (Rs.64,500 crore Tier-II).

The total support provided to PSBs towards capitalisation during the last four years stands at ₹ 5 8,634 crore. The provision for the current year is at ₹ 11,200 crore and the total market cap of Government shareholding as on 30.5.2014 stands at ₹ 4,19,711 crore.

If the PSBs are permitted to bring down GOI holding to 52 percent in a phased manner, they can raise upto ₹ 1,60,825 crore from the market. Gol budgetary support needed for 2015-19 would be ₹ 78,895 crore only, which will maintain Gol holding at 52 percent. However, as Govt. is likely to receive an amount of ₹ 34,500 crore from PSBs as dividend, the net outgo will only be ₹ 44,395 crore.

While permitting banks to raise capital from the market, the banks would be advised to preserve the Government holding at minimum 52 percent and increase the public shareholding in a phased manner through the issue of shares largely to retail investors that is to common citizens of this country.

Capital raising by public sector banks via market share issuance to meet Basel III capital requirements while retaining majority control. Public sector banks may raise capital from public markets by phased dilution of government equity to a minimum 52 percent to meet Basel III capital requirements, with emphasis on increasing Common Equity Tier 1 and other regulatory capital largely via share issues to retail investors to reduce budgetary support while retaining government control.