Public Sector Banks: A Capital Question

The Government of India’s (GoI) plan to help public sector banks (PSB) make a fresh start is well intentioned. Replenishing lost capital is necessary, but it comes with several constraints. For one, GoI’s insistence on maintaining a 50% equity in PSBs from raising capital from the market. On the other hand, SEBI’s requirement of GoI reducing its stake in PSBs to 75% of less by August 2017 also constrains further GoI infusion for several weak PSBs.

But, providing for bad loans is not enough. Why will raising the required capital – assuming they do, stem future loan losses? Given the changing landscape, GoI must ask itself, will PSBs remain relevant in the banking sector in future?

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