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Business News/ Politics / Policy/  Govt to consider ways to raise additional capital for banks: Chidambaram
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Govt to consider ways to raise additional capital for banks: Chidambaram

Suggestions include share issuance to employees, rights issues to minority shareholders, more participation of pension and insurance funds

The finance minister said the government will examine suggestions from banks and take a call on their implementation. Photo: MintPremium
The finance minister said the government will examine suggestions from banks and take a call on their implementation. Photo: Mint

New Delhi: The government will consider additional methods of capital raising for state-owned banks, including share issuance to employees, rights issues to minority shareholders and greater participation of pension and insurance funds, to ensure that the capital needs of banks are met, finance minister P. Chidambaram said on Wednesday after a review meeting with public sector banks.

The finance minister will discuss the issue with the board of the Reserve Bank of India (RBI) when it meets on 7 March in New Delhi.

Chidambaram said that banks had suggested that the Pension Fund Regulatory and Development Authority (PFRDA) and the Insurance Regulatory and Development Authority (Irda) revisit some of their regulations to allow pension funds to invest in additional tier I capital of banks.

“PFRDA has made some changes but we will talk to Irda," he said in a press briefing after the meeting.

Besides this, banks may be allowed to issue shares to their employees from where they can mobilize a significant amount of capital. Ways to raise funds from minority shareholders were also discussed.

“Even while government infuses capital into state-run banks, the minority shareholder can be given a rights issue of equal proportion to ensure that nobody’s share is diluted but at the same time funds are mobilized from minority shareholders," Chidambaram said.

The finance minister said the government will examine these suggestions from banks and take a call on their implementation.

“Whatever suggestions are finally accepted can be implemented next year at the time of capital infusion," he said.

Providing capital to state-run banks has been a strain on government finances. Under RBI rules, banks have to maintain a capital adequacy ratio of 9%, higher than the international norm of 8%. Capital adequacy, expressed as the ratio of bank capital to risk-weighted assets, is a key measure of a bank’s financial strength.

The government infused 14,000 crore into state-run banks this fiscal year; the interim budget has earmarked 11,300 crore for infusion in the next fiscal.

“It is not adequate. But banks have to look at other options to raise funds," Chidambaram said.

The finance minister had said earlier that banks should look to plough back retained profits, after payment of dividends, as capital to remain adequately capitalized. State-run banks ploughed back 35,000 crore and 37,936 crore in 2011-12 and 2012-13, respectively as capital from retained profits. The government is hoping that banks put in a higher amount into their business in this fiscal.

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Published: 05 Mar 2014, 04:46 PM IST
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