Informist, Friday, Jul 26, 2024

By Priyasmita Dutta and Sagar Sen

NEW DELHI – Out of the five public sector banks that do not meet the Securities and Exchange Board of India's minimum public shareholding norm of 25%, Bank of Maharashtra may be the first one to dilute the government stake in the current financial year, Department of Financial Services Secretary Vivek Joshi said today.

Three public sector banks have met the minimum public shareholding guidelines and another five are left, but they are quite far from meeting the 25% norm, Joshi told Informist in an interview. "We will reduce the stake in them, but I think 1-2 more banks will meet the norms by the end of this financial year. Bank of Maharashtra may be the first one to meet the guidelines."

Currently, of the 12 public sector banks, five do not comply with the minimum public shareholding norms. Among them, Bank of Maharashtra is positioned comparatively better, with a public shareholding of 13.54%, followed by Central Bank of India with 6.92%, UCO Bank with 4.61%, Indian Overseas Bank with 3.62%, and Punjab & Sind Bank with 1.75%. In April, the finance ministry had asked these banks to increase the minimum public shareholding to 25% by Aug 1.

"The Department of Economic Affairs has already written to the Securities and Exchange Board of India to extend the deadline to August 2025," Joshi said. These banks can take the Qualified Institutional Placement route to reduce the shareholding as the law is in place and only needs the approval from their respective boards, he added.

Under the government's new strategic disinvestment policy, banking has been categorised as a strategic sector, where the government needs to maintain a bare minimum presence. Though the government has expressed its intention to privatise two banks and one general insurance company, it has met with limited success so far.

Joshi said the government stands by its decision to privatise banks that was announced in the previous Budget. However, some changes need to be made to the banking laws to achieve that. "That part needs some discussion. We will have to first get that done. Then we will see," Joshi said, without giving details of the changes.

Joshi said the government needs to introduce amendments to the Banking Regulation Act, 1949 and other laws, including amendments in the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 for the privatisation. However, he said it is still unclear when will these be brought for Parliament’s approval.

On state-owned general insurance companies, Joshi said they have started to recover from their losses and, in the current fiscal, they may actually see profits. "We are bringing loss-making public sector general insurance companies into profits first," Joshi said. "One has already reported profit last year, the remaining two will also be there."

Oriental Insurance Co Ltd made a loss of 50 bln rupees in 2022-23, and it reported a profit of 190 mln rupees last year. National Insurance Co Ltd and United India Insurance Co Ltd will report profits this year, Joshi said.

Further discussing on the banking sector and the recently raised concern by Reserve Bank of India Governor Shaktikanta Das over the widening gap between credit and deposit growth, Joshi said it is linked with current account and savings account, which is around 41%. "CASA over 40% is okay, it should not go below that. So it is a challenge for banks."

At an event last week, Das had said that it was imperative that banks have prudent liquidity management measures. According to the latest data, banks' loan growth was 17.4% on year, while deposits grew only 11.1% on year, till Jun 28.

The RBI has raised concern over a higher credit-deposit ratio in the banking system at multiple forums over the last few months. Last year, the central bank had expressed concern about excessive growth in unsecured retail loans and over-reliance of non-banking finance companies on bank funding. The RBI later increased risk weights on unsecured consumer credit and bank credit to non-banking finance companies to pre-empt building up of any potential risk in these segments.

Joshi said the banks will have to improve their efficiency in terms of lending and will have to cut down their costs. "Public sector banks have the scope to improve their cost efficiency more because the cost of employees for them is very high. They can outsource some work and lower employee costs. Banks can also rationalise the number of branches for better expense management."

Another directive from the RBI that had spooked many lenders a few months ago was the proposed tighter guidelines on project financing by banks and NBFCs to avoid large defaults on infrastructure loans. The financial services department will submit suggestions on the draft norms soon. "Most quarters have sent their feedback, we are collating them," Joshi said.

On the proposed guidelines, Joshi said that in the long-run it was good for banks, even though there could be some short-term ramifications. "In the short-term, provisioning may rise, the cost of credit may also go up, but in the long-term, banks will be robust. This is also a move towards an international accounting system," he said.

As per the draft norms, lenders have to make provisions of up to 5% of the outstanding exposures to a project during its construction phase, as against 0.4% currently, which would be reduced to 2.5% once the asset turns operational. In a meeting with the secretary, many NBFCs, especially state-owned lenders like REC Ltd and Indian Infrastructure Finance Co Ltd, had flagged risks of the cost of funds going up because of these norms.

There are proposals from REC to exempt them from the provisions since they are government-backed, and they are mostly funding state government projects, Joshi said. "REC and few other NBFCs have asked if some exemption can be carved out for them, like lowering the provisioning."

"There are some issues (with the draft norms), and we need to correct them," Joshi said but added that a final call will be taken by the RBI. "We can only suggest."

Speaking about another infrastructure lender--the National Bank for Financing Infrastructure and Development, which is way behind its ambitious aim of lending 5 trln rupees in three years--the secretary said that it will start picking up now.

"NaBFID started operations only last year and the loan book is around 350 bln rupees. By 2025-26, they are targeting 3.2-trln-rupee worth of sanctioned loans. In this fiscal, they aim to sanction 2 trln rupees. So far, they have disbursed 500 bln rupees. Till July, they have sanctioned 1-trln-rupee worth of loans," he said.

It started operations only last year, even though it was set up in April 2021 as the country's fifth All India Financial Institution to support long-term non-recourse infrastructure financing, including the development of the bonds and derivatives markets necessary for infrastructure financing.

"They were in the process of hiring, they are still in the recruitment phase, but they have sufficient staff. Now they have some stability," Joshi said. End

Edited by Akul Nishant Akhoury

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