As the RBI, the banks and the new Bankruptcy Board double down to the task of resolving the bad loan imbroglio, one thing is becoming quite clear. The exercise will entail much bigger haircuts for banks than originally envisaged, bloating their capital requirements over the next two to three years. There’s already a yawning gap between government estimates of the recapitalisation needs of PSBs (₹1.8 lakh crore) and private estimates of these requirements (upwards of ₹2.4 lakh crore). It is not clear where all this extra capital will come from, with the budget-constrained Centre only committing to ₹70,000 crore. This makes it imperative for PSBs to explore unconventional methods to free up capital. In this context, a recent BusinessLine analysis (‘Hunting for value in PSBs’, July 24) has thrown up an interesting roster of strategic and minority equity stakes held by banks such as PNB, IDBI Bank, Canara Bank, Bank of India and SBI, in non-banking businesses. These span life and general insurance, asset management, merchant banking, debt broking, home finance and market infrastructure institutions. The time is opportune for PSBs to initiate a coordinated disinvestment exercise to sell these equity stakes in the market to unlock capital for use in lending activities.

There are several advantages to PSBs disinvesting stakes in these legacy businesses through the market route. For one, selling equity in non-core businesses is likely to prove more lucrative for the stressed PSBs than raise capital in their main business. Given the battered valuations of most PSBs, raising new capital entails considerable equity expansion and a steep dilution in government ownership of these banks. This may not be desirable to retain public confidence in distressed banks. Two, cutting the apron strings will ensure that these banks do not need to find the capital to fund the growth plans of these ventures. Three, with the stock market at lifetime highs, this happens to be an excellent time to float public offers and explore block sales of shares to institutions. Fortunes for sectors such as mutual funds, investment banking and depository services are highly correlated to the state of the equity markets, and the insurance sector has seen a spate of deals after its recent opening up to Foreign Direct Investment (FDI).

From a macro perspective, new listings by insurers or market institutions such as NSDL, NSE, UTI Asset Management Company and the Clearing Corporation of India can expand the pool of quality stocks, at a time when retail money is flooding equities. Listing will also ensure that the shareholding in these critical institutions is widely dispersed, reducing the room for undue influence by a few promoters. Without losing too much time, the Centre should nudge banks to commence a detailed valuation exercise for the disinvestment of non-core assets. To avoid crowding the market, PSBs with the highest proportion of stressed assets can be allowed to disinvest first.