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RBI says setting up Bank Holding and Investment Company ‘a sub-optimal solution’

‘Investors wanting to transact in banks’ shares will not have a clear idea about cash flows of the holding company, expected return on investment and so on’

Written by Sunny Verma | New Delhi |
July 3, 2016 12:56:28 am
rbi, Bank Holding and Investment Company, bhic, rbi bhic, business news RBI has argued that setting up a BHIC will be a sub-optimal solution to resolve capital raising issues at the PSBs.

The Reserve Bank of India is learnt to have opposed the government’s plan to set up a Bank Holding and Investment Company (BHIC), which will hold equity of all public sector banks and in turn raise capital for the PSBs, government sources said. A holding company was proposed in the Budget 2015-16 to improve banks’ capital raising ability and to reduce the government’s load of capitalising the state-owned banks.

In its inputs to the finance ministry, the RBI has argued that setting up a BHIC will be a sub-optimal solution to resolve capital raising issues at the PSBs, the sources said. Since the proposed BHIC will hold shares of PSBs as diverse as State Bank of India and Dena Bank or United Bank of India, investors wanting to transact in banks’ shares will not have a clear idea on issues such as the cash flows of the holding company, expected return on investment and so on.

“Due to the complexity of ascertaining the financial performance parameters of the holding company, the regulator (RBI) feels that the investors will not like such an idea,” the sources said. The central bank feels that it will be difficult for the BHIC to define clear criteria of distributing capital among the PSBs.

Finance minister Arun Jaitley, in the Budget 2015-16, had announced setting up of an autonomous Bank Board Bureau, which was to be transformed into a BHIC. The government has already set up the Bank Board Bureau headed by former Comptroller and Auditor General of India Vinod Rai, which is currently helping in key appointments in the PSBs. “The (Bank Board) Bureau will search and select heads of Public Sector banks and help them in developing differentiated strategies and capital raising plans through innovative financial methods and instruments. This would be an interim step towards establishing a holding and investment Company for Banks,” Jaitley said in his 2015-16 Budget speech.

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Since a holding company is expected to leverage its equity base, it was expected that this would help in lowering the government burden of infusing funds into the PSBs. Capital needs of the PSBs are expected to rise due to increase in their non-performing assets and falling profitability.

While the finance ministry estimates say that PSBs would need Rs 1.80 lakh crore by March 2019 to meet Basel III norms, under its ‘Indradhanush’ plan to reform the banks, the government plans to provide only Rs 70,000 crore as equity for PSU banks and the rest will have to be raised from the market or through their internal profits.

Last August, the finance ministry unveiled a plan called ‘Indradhanush’ to reform PSU banks which also detailed capital infusion for the next four years, some of which would depend on the performance of the lenders.

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As per the plan, the government will provide only Rs 70,000 crore as equity for PSU banks and the rest they have to raise from the market and through their internal profits. The Centre also allowed banks to bring down government shareholding to up to 52 per cent.

State-owned were also advised to focus on core business and raise funds by diluting stake in subsidiaries or listing them on stock exchanges. As per the government’s capitalisation plan, state-owned banks will get Rs 25,000 crore in 2015-16 as well as in 2016-17. The government will infuse Rs 10,000 crore each in 2017-18 and 2018-19. Finance ministry has maintained that, if required, the PSBs will be provided capital more than budgeted. A recently released report by rating agency Moody’s says that the 11 PSBs that its rates would need capital of about Rs 1.2 lakh crore until 2020.

‘Reducing govt’s capital infusion burden’

* Finance minister Arun Jaitley, in the Budget 2015-16, had announced setting up of an autonomous Bank Board Bureau, which was to be transformed into a BHIC. The government has already set up the Bank Board Bureau headed by former CAG of India Vinod Rai

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* Since a holding company is expected to leverage its equity base, it was expected that this would help in lowering the government burden of infusing funds into the PSBs. Capital needs of the PSBs are expected to rise due to increase in their NPAs and falling profitability

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First published on: 03-07-2016 at 12:56:28 am

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