IBA recently made a representation to the government proposing consolidation of public sector banks as well as dilution of government holding to below 51%. Reduction of government holding to 26% or even 33% it was suggested, would allow the government to be the single largest shareholder though it may lose the right of appointment, which shall rest with the RBI thereafter. Also since RBI rules do not permit any bank to hold more than 5% equity in another, government control would be ensured.
As an alternative, mechanisms such as "Free Carry Equity" or maybe even the "Golden Share" concept maybe used to ensure government control in these banks. The implementation of these mechanisms, if accepted, would require substantial overhaul of rules & regualtions governing the banking sector.
The issue of government stake in PSU's assumes immense significance as the current regulations restricting the government holding in these institutions from falling below 51%, are seriously denting the ability of these banks to raise capital. Inability to raise capital is adversely impacting the expansion plans of these banks, who shall also have to be mindful of the Basel II norms which kick in from March'08 for all those banks with international presence. Also since most banks today have insurance subsidiaries which are in need of immense capital infusion (the 26% cap on foreign holding adding to the woes of the local partners who have to bring in the rest 74%), there is an urgent need to address the way in which they can raise fresh capital.
Thus relaxation of capital raising norms in a manner which takes care of the interests of all the stake holders is an imperative. While stringent regulations resulting in healthy financial institutions is the need of the hour for an economy like India which is on a growth trajectory, the regulators also must ensure that the regulations dont end up being an impediment in the growth path of these institutions.
