Mumbai: The first budget of the Narendra Modi-led government on Thursday fuelled expectations of long-awaited reforms of public sector banks, but lack of details such as a time frame for implementation of the proposals outlined by finance minister Arun Jaitley left room for some amount of scepticism.

In his budget speech, Jaitley said the government will cut its stake in state-run banks by selling shares to retail investors and also consider giving greater autonomy to these banks, which make up roughly 70% of the Indian banking industry’s assets.

The government also agreed “in principle" on the need for consolidation of state-owned banks, the finance minister said.

Jaitley estimated that public sector banks will need 2.4 trillion of capital by 2018 to comply with Basel III international regulatory norms.

“To meet this huge capital requirement we need to raise additional resources to fulfil this obligation," he said. “While preserving the public ownership, the capital of these banks will be raised by increasing the shareholding of the people in a phased manner through the sale of shares largely through retail to common citizens of this country."

The speech was, however, short on detail and it remains unclear how the government proposes to manage the sale of shares, said Abizer Diwanji, national leader and head of financial services at consulting firm EY.

“Retail participation in the equity market is at a low and in this situation it’s very difficult to sell shares to common people," Diwanji said. “The announcements are very vague at the moment. We need more clarity. He talked about a lot of things like autonomy and consolidation in the banking sector but I think the government is still figuring out how to go about it. We will have to wait for detailed guidelines on each of them."

To be sure, a sizeable chunk of money can be raised through equity dilution in banks, other analysts said.

According to Upasna Bhardwaj, an economist at ING Vysya Bank Ltd, retail investors can absorb about 80,000 crore in public sector bank shares over the next three years, provided the stock markets remain firm.

“Government can technically maintain 51% stake in all banks and still raise 60,000-70,000 crore through the market if all banks put together go to the market to raise money," M.S. Raghavan, chairman of IDBI Bank Ltd.

“We have asked government to allow us to raise 4,000 crore that will see us through for the next two years. After this budget, we are confident we will get the go-ahead," Raghavan said.

The government holds a 76.5% stake in IDBI Bank. After the share sale, the government’s stake will drop to 51%.

Jaitley said that while the government will keep a majority shareholding in the banks, “the citizens of India will also get direct shareholding in these banks, which currently they hold indirectly".

He added that the government was examining a proposal to give public sector banks “greater autonomy".

Consolidation—or mergers and acquisitions—of public sector banks would not be easy because of resistance from bank unions and lack of technology compatibility.

State Bank of India (SBI), the country’s largest lender, struggled to merge two of its associates—State Bank of Saurashtra in 2008 and State Bank of Indore in 2010—with itself. Since then, SBI put plans to merge the remaining five of its associates with itself on the backburner.

“A well-thought-out consolidation could be the need of the country now. A good merger gives better geographical spread and better product benchmarks," said Bank of Baroda chairman S.S. Mundra.

He added that a few big banks in the system can use scarce government resources more effectively than a fragmented banking system.

The budget contained other measures for banks, encouraging them to increase lending to long-term infrastructure projects by allowing them “flexible structuring" to avoid potential losses.

More importantly, Jaitley plans to allow banks to raise long-term funds to lend to infrastructure projects, with “minimum" restrictions pertaining to statutory requirements such as the cash reserve ratio, statutory liquidity ratio and lending to the priority sector.

“This provision is welcome. This will more than adequately compensate any tenor premium that the banks will be paying. The investor appetite will remain healthy," said Ananda Bhoumik, senior director, India Ratings and Research.

To tackle rising non-performing assets in public sector banks, the government will set up six new debt recovery tribunals in Chandigarh, Bangalore, Ernakulam, Dehradun, Siliguri and Hyderabad, Jaitley said.

“Government will work out effective means for revival of other stressed assets," he said.

The budget announcements initially led to gains in bank stocks, but by close of trading, most had fallen.

At the close of the market, the 12-share Bankex index dropped 0.63%, while the benchmark index, the Sensex, fell 0.28% to 25,372.75 points.

SBI lost 1.31%, Canara Bank gained 0.68%, Yes Bank Ltd advanced 3.11%, Punjab National Bank fell 1.06%, ICICI Bank Ltd retreated 0.88%, Bank of Baroda dropped 0.95% and Axis Bank Ltd gave up 0.78%.

While the budget was positive for the banking sector, the absence of big announcements like a holding company structure for public sector banks had come as a disappointment for investors, said Vijay Agarwal, joint general manager and analyst for the banking sector at Care Ratings Ltd.

Vishwanath Nair contributed to this story.

Close