Finance Ministry plans to cut government stake in PSU banks to 58%

NEW DELHI: The finance ministry is drawing up recapitalization plans with government equity in public sector banks set at 58%, even as the draft report of the PJ Nayak committee has recommended cutting the Centre's stake in state-owned banks to under 51%.

In a presentation prepared for finance minister Arun Jaitley, the department of financial services had suggested that the government could dilute its holding in banks such as IDBI Bank, Indian Bank and Bank of India to 58%. Although the law allows the government to hold over 51% stake in a public sector bank, as a comfort to investors, the finance ministry had raised the threshold to 58% at the time of the global financial crisis.

With providing capital becoming a major pressure on the Budget, the finance ministry is looking at ways to minimize its burden and has made a provision of Rs 11,200 crore in the Budget for 2013-14. Sources said some of the banks can be capitalized through preferential issue of shares to the government. Banks need to expand their equity base as their business increases and to maintain its stake at 58%, the Centre needs to pump in more equity.

With the government keen to maintain strict financial discipline, the finance ministry wants banks to depend more on internal accruals through better cash recoveries and a cost cutting drive to reduce the recapitalization burden on the exchequer.

In addition, it is suggesting that lenders leverage their real estate assets to raise money from the market.