Is $26bn banks stake sale enough to meet Basel III norms?

Moneycontrol Bureau

The Narendra Modi government pushed through the first big step towards recapitalizing cash-strapped state-run banks when yesterday it allowed them to pare the government’s stake in each to 52 percent.

At current market prices, stake sales in each of the listed 27 banks, in which the government currently holds between 56 to 84 percent, could fetch them about Rs 1.6 lakh crore, or USD 26 billion.

The stake sales are supposed to take place gradually over the next two years. The move achieves two targets.

One, it paves the way for banks to shore up their capital to prepare for the imposition of Basel III norms that kick in from 2019.

Public sector banks were the worst hit during the economic slowdown of the past few years, and elevated non-performing asset (NPA) levels has resulted in massive capital erosion for most.

As part of Basel III, banks will have to maintain minimum capital adequacy ratio at 7 percent and Tier I capital of 5.5 percent.

And two, it pushes through a massive reform in which the government brings down its stake near the minimum required to maintain majority stake. This could serve as a precursor for the government to kickstart a privatization drive.

But here’s why the government’s move may not be enough for banks. Estimates over how much banks require range from USD 35 billion to USD 200 billion, depending on how the bad assets crisis is resolved over the next few years.

And two, if the government intends to sell shares worth Rs 1.6 lakh crore over, say, four years, it means divestment of about Rs 40,000 crore. This is over and above the normal divestment issues that the government will need to fund its own requirements.

The previous government’s track record on this, where it sold anywhere between Rs 20,000 crore and Rs 40,000 crore shares over the past several years, inspires little confidence.

Even the incumbent government, which has an ambitious Rs 58,000 crore for the year, is yet to start the program in any meaningful way, even as the financial yearend has a few months to go.

This has been despite generally favourable market conditions. It’s easy to imagine what would happen to stake sales should the stock market collapse and investor appetite dry up.