Govt may have to cut PSU bank stake below 51%: Jaitley should read Sinha's 2000 budget speech

By all accounts, Prime Minister Narendra Modi is not a privatiser. He prefers to make the public sector companies work better by appointing competent people to lead them. His finance minister, Arun Jaitley, too has gone on record to say that disinvestment in public sector banks will not mean reducing the government’s stake below 51 percent.

Both Modi and Jaitley may have to rethink their options, especially when it comes to banking. Reason: banks need capital to grow all the time. In the case of public sector banks that are being given wider and wider mandates for financial inclusion, including lending more to non-prime borrowers, more capital is like oxygen.

This means, sooner or later, the government has to bite the bullet and let its holdings fall below 51 percent. That is, privatise banks. Both Modi and Jaitley would do well to read Yashwant Sinha’s budget address of 2000-01, when he first proposed the idea.

Rajiv Lall, Executive Chairman of infrastructure lender IDFC, reckons that letting go of public sector banks may have to be done sooner than later. His argument is simple: if public sector banks have to be compliant with Basel III norms, which call for more risk capital, the government will be forced to go below 51 percent pretty soon. The PJ Nayak Committee which looked into the question said public sector banks would require Rs 3,10,000 crore of capital if they have to grow their loan books by 16 percent a year, and if 30 percent of the restructured assets (ie, rescheduled loans) go bad.

Writing in Business Standard , Lall says: “The total market capitalisation of PSU banks at today’s equity prices is about Rs 4 lakh crore and the weighted average government ownership is about 62.5 percent. Raising even Rs 2 lakh crore would dilute the government’s ownership share to under 42 percent.”

In other words, recapitalisation needs alone will force privatisation over the next three to four years.

In a recent article on State Bank of India’s own capital needs , I had argued that the SBI can raise capital by selling some of its own subsidiaries.

NDA-2 under Modi has been more cautious that NDA-1, where Yashwant Sinha, in tougher circumstances, started talking about bringing government stakes below 51 percent as early as in February 2000.

In that speech, Sinha as Finance Minister had this to say: “To meet the minimum capital adequacy norms set by RBI and to enable the banks to expand their operations, public sector banks will need more capital. With the government budget under severe strain, such capital has to be raised from the public which will result in reduction in government shareholding. To facilitate this process, government have decided to accept the recommendations of the Narasimham Committee on Banking Sector Reforms for reducing the requirement of minimum shareholding by Government in nationalised banks to 33 percent. This will be done without changing the public sector character of banks and while ensuring that fresh issue of shares is widely held by the public.”

The fudge here is his claim that 33 percent ownership will not change the public sector character of banks.

The Indian budget is not in much better shape today than it was in 2000, but the challenges of a fast-growing economy are even greater now, what with the demographic bulge calling for more job creation. This needs a well-capitalised financial sector which can finance entrepreneurship.

Both Modi and Jaitley need to re-read Yashwant Sinha’s 2000 budget speech even though Sinha didn’t actually reduce government holdings in any bank to 33 percent.

With a government majority in place, Modi and Jaitley need to bite the bullet on privatising at least some banks over the next two-three years. They have, as Rajiv Lall suggests, no other choice.