Banks With Low Capital To Be Merged With Comfortably-Placed Ones; Govt Holding Too Will Be Key Guide
PUBLIC sector banks (PSBs) with a low capital adequacy ratio (CAR) may be merged with the ones which have high CAR to ensure that there is no strain on the capital of that particular bank. The proposal, submitted by the Committee on Financial Sector Assessment (CFSA), has found favour with the government, which is the majority shareholder in all the PSU banks.
CAR is the ratio of capital that a bank has to keep aside before extending any loan that has risk attached to it.
The government has favoured the committee’s proposal of merging a bank having less capital with another bank having comfortably high capital The final decision in this regard will be taken by the board of the banks involved.
Also, there is a likelihood that the government would opt for the merger of a bank where government shareholding is more with a bank with lesser government shareholding.
The government cannot infuse additional capital to banks on a perennial basis, especially if the credit portfolio of banks grows at a compounded annual growth rate of more than 30%.
In this scenario, it would be then necessary that bank’s other shareholders infuse capital into the bank. But if the bank’s other shareholders infuse additional capital, it would increase their shareholding in the bank.
In many public sector banks government shareholding is at the mandatory level of 51%. These banks can neither raise capital through the market nor from their other shareholders as the law does not allow the government to bring down the shareholding below 51%. Merger of smaller banks with the larger ones will be the only option then.
The CFSA has expressed apprehension that public sector bank’s growth could be constrained compared to other players as in many of these entities government shareholding is already at the statutory limit of 51%. It has also warned that the problem could get exacerbated in view of the implementation of the Basel II guidelines, which could require more capital infusion.
The only seemingly viable option thus is the amalgamation of banks that have synergy in the areas of their operation.
WHY AMALGAMATION?
The government cannot infuse additional capital to banks on a perennial basis
Banks can ’t raise capital from their other shareholders as it would increase their shareholding in the banks
So, banks can neither raise capital through the market nor from other shareholders.
Banks need additional capital in view of the implementation of the Basel II guidelines
Thus, merger of smaller banks with the larger ones is the only option available for banks
PUBLIC sector banks (PSBs) with a low capital adequacy ratio (CAR) may be merged with the ones which have high CAR to ensure that there is no strain on the capital of that particular bank. The proposal, submitted by the Committee on Financial Sector Assessment (CFSA), has found favour with the government, which is the majority shareholder in all the PSU banks.
CAR is the ratio of capital that a bank has to keep aside before extending any loan that has risk attached to it.
The government has favoured the committee’s proposal of merging a bank having less capital with another bank having comfortably high capital The final decision in this regard will be taken by the board of the banks involved.
Also, there is a likelihood that the government would opt for the merger of a bank where government shareholding is more with a bank with lesser government shareholding.
The government cannot infuse additional capital to banks on a perennial basis, especially if the credit portfolio of banks grows at a compounded annual growth rate of more than 30%.
In this scenario, it would be then necessary that bank’s other shareholders infuse capital into the bank. But if the bank’s other shareholders infuse additional capital, it would increase their shareholding in the bank.
In many public sector banks government shareholding is at the mandatory level of 51%. These banks can neither raise capital through the market nor from their other shareholders as the law does not allow the government to bring down the shareholding below 51%. Merger of smaller banks with the larger ones will be the only option then.
The CFSA has expressed apprehension that public sector bank’s growth could be constrained compared to other players as in many of these entities government shareholding is already at the statutory limit of 51%. It has also warned that the problem could get exacerbated in view of the implementation of the Basel II guidelines, which could require more capital infusion.
The only seemingly viable option thus is the amalgamation of banks that have synergy in the areas of their operation.
WHY AMALGAMATION?
The government cannot infuse additional capital to banks on a perennial basis
Banks can ’t raise capital from their other shareholders as it would increase their shareholding in the banks
So, banks can neither raise capital through the market nor from other shareholders.
Banks need additional capital in view of the implementation of the Basel II guidelines
Thus, merger of smaller banks with the larger ones is the only option available for banks
