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Milking the finance ministry

India: The State they’re in

Indian public sector lenders such as State Bank of India get funding from the cheap deposits they draw into their vast branch networks – the legacy of their incumbency and branch expansions of the past. But the amount of capital they can raise through equity is constrained by the minimum 55% stake the government holds in State Bank of India and its minimum 51% in other public banks.

State Bank, which is 59.7% owned by the government, partly circumvented this restriction in February through a $4 billion rights issue. As the government did not want to dilute its stake, it paid $2.5 billion in the form of market-tradable bonds with coupons of 8.35% and 2024 maturities.

How often the government will be willing to do this for the state banks is unclear. But one banker from a global firm says two other public banks – Union Bank of India and Bank of India – might be able to reach similar deals soon. "We are having preliminary discussions with the government. Once they agree, we will go for it," says RS Reddy, executive director of Union Bank, when asked about a possible rights issue.

Union Bank has also received a rating in preparation for a possible $2 billion medium-term-note programme.

Bank of India did not comment.

And according to its chairman, State Bank of India might be back in the market in financial year 2009/10 – it has yet to be decided whether or not this will be via a rights issue, and for a similar amount.

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