A stitch in time saves nine. The government has, over the years, received advice from numerous quarters to reduce its stake in public sector banks (PSU banks) to below 51%, so that these lenders have sufficient capital for growth. While the government has rejected this line of thought, it had itself talked of reducing its stake from existing levels to around 52% by allowing banks to raise equity capital from other sources. But things have gone in the opposite direction, as the chart below shows, with the government’s stake rising above 95% in one case.

This is a direct outcome of the unprecedented capital infusion the government has done after it committed to give R 2.11 trillion over two fiscal years to its struggling lenders under the PSU bank recapitalisation plan. In December, it upsized its commitment by another 41,000 crore, considering PSU banks weren’t able to raise money from the markets.

One may argue that the centre can’t be blamed, considering it did its job of helping the banks as the largest shareholder by infusing money. But from a minority shareholders’ perspective, the equity dilution has been immense in these banks, with the government having waited far too long to act on bank recapitalisation. While the government dragged its feet over recapitalisation, there was an erosion of market value and net worth of these banks. It too suffered as a shareholder due to the erosion. Now, it also finds itself in a situation where coming down to the desired 52% stake looks like a pipe dream.

Another fallout of the increase in government ownership is that these banks are now flouting minimum public shareholding norms set by the capital market regulator. This, in turn, has led to a slew of announcements by public sector banks to make large issuances under the employee stock option mode, with a view to meet these norms. Syndicate Bank, for instance, will issue as many as 300 million shares to employees, on an equity base of 1.6 billion shares.

Part of the capital infusion in FY18 was done through recapitalisation bonds. In this route, the government issues bonds to banks and uses the proceeds to buy their shares to infuse capital. This route was frowned upon since the banks ended up shifting money from their investment book to their capital base.

The government in its rescue mission has increased its hold on banks in direct contrast to what it had promised in 2014. Recall that when the current government was formed a slew of banking reforms were promised, one of which was to bring down the centre’s stake in the banks it owns.

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