Finance ministry revives proposal to set up holding company for state-run banks

NEW DELHI: The finance ministry has revived a proposal to set up a holding company for state-run banks that will find it easier than individual lenders to raise capital and deploy it in banks that need it the most.

The government is re-examining the structure of the holding company to see whether it will be viable, two persons familiar with the matter said.

The proposal was first discussed in 2012, but it hasn’t been taken up in earnest since a committee headed by the then finance secretary RS Gujral raised concerns over the viability of the holding company.

The move comes at a time when the ministry has already floated a cabinet proposal to reduce the government’s stake in state-run banks to 52%.


“It needs a fresh look to see if the financial holding company is able to service the debt it raises through partial capital support from the government and the remaining through stake sale,” one of the officials said on condition of anonymity.



Among the ideas being considered is to let the government provide capital to the financial holding firm for a period of at least 10 years, after which the firm should be able to service its debt through profits and subsequent dividend income. According to the government’s estimates, these banks require Rs 2.4 lakh crore as equity by 2018 to meet capital requirements. However, the government has allocated just Rs 11,200 crore for bank capitalisation in the current fiscal.

The finance ministry had earlier sought clarity on the legislative changes that might be required in various laws such as Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and 1980, for smooth transfer of shares.

“Let us see the financial viability aspect, then we may again seek clarity from other arms of the government,” a finance ministry official said.

Earlier, the Reserve Bank of India (RBI) had also raised concerns on the viability of such a holding firm and the subsequent impact on the public sector banks.“RBI was of view that if the holding company comes under stress, the impact on banks will be detrimental,” said the ministry official, adding that RBI had proposed that the leverage available for the financial holding company should be kept at 1.25 times the equity capital.

The government is also exploring other options to make capital available to banks so that they can step up lending.