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Cabinet nod for banks to raise capital by selling government stake

Cabinet nod for banks to raise capital by selling government stake

New Delhi: The union cabinet Wednesday decided to permit public sector banks (PSBs) to raise up to Rs.160,000 crore from capital markets by diluting government holding to 52 percent in phases so as to meet Basel III capital adequacy norms.

"Capital requirements of banks have increased under Basel-III. The quantum of capital support needed by banks is huge, which cannot be funded by budgetary support alone," a cabinet communique said.

"If the PSBs are permitted to bring down government holding to 52 percent in a phased manner, they can raise up to Rs.1,60,825 crore from the market," it added.

The cabinet asked the public sector banks to broadbase retail shareholding while going in for the fund raising.

The government controls 22 of the 27 public sector banks through majority holding. In the remaining 5 banks, state-run State Bank of India holds majority stake.

Presenting his maiden annual budget in July, Finance Minister Arun Jaitley had said that the capital of state-run banks will be raised through sale of shares to the public.

The measure is to meet India's obligations under the Basel banking accord signed by 27 nations on capital adequacy norms to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses.

Upwards of Rs.240,000 crore of capital by equity is required to be infused into India's banking sector by 2018.

The Basel III norms, which will come into effect from March 31, 2019, were put in place following the 2007-08 financial crisis in the US.

The total support provided to PSBs towards capitalisation during the past four years was Rs.58,634 crore, the statement said, adding the provision for the current year is at Rs.11,200 crore. The total market cap of government shareholding as on May 2014, stands at over Rs.419,000 crore.

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