FinMin aims to recover bank recap funds via dividend, tax

NEW DELHI: The finance ministry hopes to recover the money spent on recapitalising public sector banks through higher dividends and tax, as it drums up support for the proposal before taking it to the cabinet.

It expects the PSU banks that have received capital infusion to earn around Rs 3,760 crore per annum by deploying these funds at an estimated yield of 10% per annum. Another Rs 1,280 crore will come through tax and some more through dividends.

“The capital infusion in public sector banks will generate a return of around 15%, said a finance ministry official.

The proposal for the recapitalisation of PSU banks will soon be submitted for cabinet approval.
Last year, the public sector banks had paid a dividend of Rs 8,042 crore to the government. Usually, a public sector bank (PSB) has to pay a minimum 20% of post-tax profits as dividend.

The finance ministry estimates that after the capital infusion through equity shares, the banks can give an extra dividend of Rs 670 crore on a very conservative return of around 3%. “Similarly, on investment through perpetual non-cumulative preference shares, a dividend of Rs 1,251 crore is expected,” the official said.

As per the finance ministry proposal, the government is looking to infuse around Rs 37,000 crore in 21 public sector banks. “We are looking to infuse this amount in tier I capital funds of PSBs either through equity route or innovative tier I instruments such as innovative perpetual debt instruments (IPDI) or perpetual non-cumulative preference share,” said the finance ministry official.

According to a chairman and managing director of a Mumbai-based public sector bank, the government may earn higher revenues since infusion in tier I structure will allow banks to raise more capital. “Since the banks will also be eligible to raise tier II capital and hence generate almost equal additional revenues and pay more taxes,” he said.

The government aims at completing this capital infusion in PSBs by 2012. In the Union budget for 2010-11, the government had announced a recapitalisation support of Rs 16,500 crore to the PSBs.

Banks’ capital structure consist of tier-I and tier-II capital and so far four banks have been approved for a capital support of Rs 4,600 crore, of which Rs 1,900 crore has already been disbursed.

The major components of tier-I capital are equity share capital, equity share premium and statutory reserves. According to Basel-II requirements, banks need to maintain a capital adequacy ratio (CAR) of 12%, including tier-I and tier-II capital.