Budget 2012: A new entity for helping Public Sector Banks

Finance Minister Pranab Mukherjee has proposed setting up of a company to hold the government's stake in banks, a move aimed at overcoming the trouble of periodic capital investment in public sector lenders that upsets fiscal calculations.

The new holding company may also eliminate the embarrassment of knocking at the doors of Life Insurance Corporation, as it did this year, to bail out the government by investing policy holders' funds in public sector banks. The move also raised questions about governance standards at the state-run insurer.

The FM raised the outlay for capital investment in state run banks next fiscal by 32% to Rs 15,888 crore, as the system moves towards meeting the stringent capital requirements of the so-called Basel III global norms to prevent recurrence of the 2008 credit crisis. "The government is also examining the possibility of creating a financial holding company, which will raise resources to meet the capital requirements of public sector banks,'' Mukherjee said in his Budget speech.

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The proposed structure may be a corporation set up through a special Act of Parliament, so that it is also away from regulatory glare, said a person familiar with the details. This corporation will be responsible for providing capital to banks, though it is not clear how it would raise funds.

"The move to set it up as a corporation is mainly to ensure that the holding company does not come under the ambit of the Companies Act, or within the Reserve Bank of India's net as a finance company,'' said an official at the finance ministry who did not want to be identified.

"Instead, if it is set up as a corporation through an Act of Parliament, the government will have full control over it.'' The government is working out this new structure as nearly three-fourths of the banking system is under state control and it is unwilling to reduce its stake below 58%.

Although the minister did not spell out how the government would raise capital and distribute it without dipping into the government's kitty, some speculate that the equity of the holding company itself could be sold to public and the proceeds re-invested.

The dividend the holding company receives will be passed on to the government. LIC, fully-owned by the government , stepped in for the government to invest more than Rs 8,000 crore in various staterun banks, including Punjab National Bank and Bank of Maharashtra, to ensure that they had enough capital. This holding company's mandate may extend beyond the banks to include other financial institutions such as the LIC, General Insurance Corp, National Bank for Agriculture and Rural Development, Power Finance Corp and others, said the person.

Source: EconomicTimes