Starved of funds, government asks LIC to help capitalise small public sector banks

Source: The Economic Times

Sandwiched between an urgent need for capital and a financially wrecked owner, small state-run banks will knock on the doors of Life Insurance Corporation as they prepare to sell new shares to raise funds, said three people familiar with the plans. 

Dena Bank and Bangalore-based Syndicate Bank may be the first among nearly a dozen small public sector banks which will sell shares in the next few months to raise a few thousand crores, they said. 

LIC, the biggest institutional investor in the country with annual equity investments of about 40,000 crore, will walk along with the government in capitalising banks that are restructuring debt even as they are saddled with rising bad loans. 

The government, which is set to breach the fiscal deficit target of 4.6% of the gross domestic product by a percentage point, has committed to pump 18,000 crore into large lenders such as State Bank of India, Punjab National Bank and Central Bank of India. 

"There is a chance that LIC may step in to support the government," said a bank executive who hasn't got the government's commitment on capital. "The pricing will be based on a Sebi formula and will leave no room for speculation." 

A government starved of resources and a weak equity market, despite a 14% rise this year, is hampering fund-raising plans of public sector banks. With the government unwilling to let its stake fall, it is leaning on LIC to buy new shares, which would give it the comfort that it indirectly retains ownership in the banks. 

The Dena Bank board will meet on Monday to consider a share sale to insurance companies and government-sponsored mutual funds. 

Syndicate Bank, in which LIC holds more than 10%, will meet on Saturday to consider sale of shares.