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Closing LIC Tap to be Tough for Banks to Raise Funds

Published: 25th May 2015 06:04 AM  |   Last Updated: 25th May 2015 06:04 AM   |  A+A-

MUMBAI: Several public sector banks (PSBs) planning to raise capital selling shares may find the going tougher as the Reserve Bank of India subtly and indirectly hinted its discomfort at the rising stake of Life Insurance Corp of India (LIC) in several PSBs.

LIC is increasingly a favoured buyer for most banks seeking capital. As this tap starts shutting banks will have to tap the public capital markets at a time when their elevated levels of non-performing assets make them low on investors’ choice. As the government begins to push PSU disinvestment, it’ll be even tougher for banks to get the attention of global and local investors.

Over the past six months LIC’s stake in Central Bank of India, Bank of Maharashtra, United Bank of India and Punjab and Sind Bank has increased significantly, as also in Bank of India. Canara Bank was the latest to place on a preferential basis 400 crore shares to LIC to raise capital. LIC owns more than 9 per cent in several large state-run banks.

S S Mundra,RBI Deputy Governor said on Friday that any institution that owns a single largest stake in state-run banks can potentially pose a systemic risk. He said from the view point of inter-connectedness and contagion it is potentially a risk and as a probability it can affect financial stability. It may not happen tomorrow but it’s a probability, he said.

LIC owns 22.54% in Corporation Bank, 14.9% in Bank of India, 13.4% in Central Bank of India, 11.8% in State Bank of India, 12.12% in United Bank of India, 11.5% in Allahabad Bank, 11.2% in Punjab National Bank, 11.24% in Bank of Maharashtra, 10.5% in Punjab & Sind Bank, 9.95% in Bank of Baroda, 8.6% in IDBI Bank, 8.1% in Syndicate Bank, and 7.3% in Canara Bank, among the leading ones.

State run banks will need to raise as much as Rs 2.20 lakh crore up to fiscal 2019 to meet Basel-3 capital adequacy norms, according to Moody’s Investors Service.

“If LIC doesn’t capitalise them then who will? The government is not capitalising public sector banks because of fiscal deficit and since the main focus of PSBs is not profit they may not appeal very much to investors,’’ said Hemindra Hazari, an independent banking analyst.

“If public sector banks are asked to make profit as their main focus, as per the P J Nayak committee report, they will become risk averse, which could accentuate the economic slowdown.’’

Some banks are already beginning to prepare themselves to boost their capital adequacy. While State Bank of India and Punjab National Bank already have board approvals in place for a share sale, reports suggest Dena Bank and Central Bank of India too may have similar plans.

While many banks have been able to sell shares at a premium to LIC, capital raising will get tougher since these banks will have to compete in the public capital market at a time when most public sector banks have high non-performing assets (NPAs). It is likely to make it tougher for them to get even a fair valuation of their performance.



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