BackGovt may let state-run banks leverage real estate holdings to raise capital
Banks have suggested that a special purpose vehicle should be set up by each bank and the real estate assets transferred to this
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New Delhi: The government is considering a plan to allow state-run banks to leverage their real estate holdings to raise capital, even as the Reserve Bank of India has given its nod for state-run banks to raise funds from employees and setting up holding companies for banks and their subsidiaries.
Banks have suggested that a special purpose vehicle (SPV) should be set up by each bank and the real estate assets transferred to this SPV. The SPV will then raise money for the banks.
The government is yet to take a decision but this is among the various options being considered, said G.S. Sandhu, secretary, department of financial services, after a review of the performance of state-run banks.
“It is a good idea. The purpose is to convert assets that are severely undervalued in the banks’ books to their market valuation. Once the assets are transferred to the SPV at the market rate, investors should be willing to put in cash which can be then added to the tier-1 capital of banks," said Ananda Bhoumik, senior director, India Ratings and Research Pvt. Ltd. “But on the flip side, the cost of operations for the bank will go up since they will have to lease back the property from the SPV for use," he said. The finance ministry has been looking at various options to meet the capital requirements of banks besides direct capital infusion. The government has set aside ₹ 11,200 crore in the interim budget for capitalization of public sector banks in the current fiscal. “Another ₹ 6,000-8,000 crore may be provided to them in the budget," he said.
Sandhu said the central bank has given its nod for capital-raising through share issuance to employees. The central bank has also cleared the proposal wherein each bank can set up a holding company wherein the subsidiaries will be transferred to this company. The holding company will then go the market to raise funds.
The government is now waiting for market regulator Sebi’s nod on this.
Other proposals for capital infusion being considered are rights issues to minority shareholders and greater participation of insurance funds in perpetual bond issuances of banks. Sandhu said that talks are going on with the insurance regulator to allow insurance companies greater participation in perpetual bond issuances of state-run banks.
The government stake, however, will be maintained at 51%, Sandhu said.
In the review meeting, the government asked banks to improve their current and savings account (Casa) ratio to 40%. Casa deposits are low-cost deposits. Banks have also been asked to take a tough stand against wilful defaulters and consider even changing the management of the defaulting company where required.
Sandhu pointed put that there has been an improvement in the asset quality of state run banks in the fourth quarter with gross NPAs declining to 4.44% as of March end, as against 5.07% on 31 December.
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