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Banks' holding company plan on hold

Source : BUSINESS_STANDARD
Last Updated: Fri, Nov 23, 2012 20:41 hrs
An employee sorts Indian currency notes at a cash counter inside a bank in Agartala

The finance ministry is likely to defer the proposal to set up a holding company for recapitalising public sector banks, as was suggested by former finance minister Pranab Mukherjee.

The holding company may not become operational before 2014-15 and the finance ministry will continue to infuse capital into banks from budgetary resources till the next financial year, officials said. Besides direct capital infusion, the government will also subscribe to rights issue of public sector banks. "Holding company will become operational from 2014-15. Right now, the capital requirements of banks are not huge and we can manage through the Budget and by the way of subscribing to rights issue," said a finance ministry official, who did not want to be identified.

The idea was that the holding company would raise money from the market and give it to banks. The official said it was much cheaper for the government to raise money from markets than via the holding company. It becomes a different matter when the cash requirements of banks inflate when Basel-III norms kick in. Private players would not find money to borrow if government starts going to the market for funds.

The finance ministry had sent the guidelines for setting up the holding company to the Reserve Bank of India (RBI) sometime ago but the central bank has not given its comments yet. It is learnt that RBI differs with the finance ministry on some points and wants changes in some norms.

Differences of opinion have already cropped up between the finance ministry and RBI over repo rate cut in its latest monetary review last month and norms for licences to new banks.

This would not be the first time the finance ministry is reviewing proposals that were brought in during the tenure of Pranab Mukherjee as finance minister. Mukherjee has suggested the General Anti-Avoidance Rules (GAAR), Retrospective Amendments to the Income Tax Act and the bank holding company.

In Budget 2012-13, the government had proposed to create a financial holding company, which will raise resources to meet the capital requirements of public sector banks. It had also made provision of Rs 15,000 crore for recapitalising banks in the current financial year.

RBI had earlier said Indian banks would need an additional capital of Rs five lakh crore to meet Basel-III norms, which will be implemented in a phased manner by March 2018. The government alone will have to provide Rs 90,000 crore to retain its shareholding at current levels. RBI Governor D Subbarao had expressed doubts on whether the government could infuse this amount of capital without lowering its holdings in the banks to 51 per cent.

The holding company, likely to be a statutory body to be set up under an Act of Parliament, was expected to ease the burden on the government to provide for bank recapitalisation from Budget. The finance ministry will now provide Rs 15,000 crore support in the last quarter of 2012-13.




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