Acknowledging difficulties in recapitalising of public sector banks in the migration to the stricter Basel III norms, Prime Minister’s Economic Advisory Council (PMEAC) chairman C. Rangarajan, on Thursday, said reduction in stakes by the government was fraught with “political problems“.

“The other alternative of reducing the share of the government in public sector banks poses difficult political problems,” Dr. Rangarajan said addressing a financial summit here.

His comments come within two days of Reserve Bank Governor D. Subbaroa stating that if the government decides to maintain its stake at 57 percent, it will have to pump-in Rs.90,000 crore while if it decides to bring it down to 51 per cent, it would need to infuse Rs.70,000 crore.

Given the difficulties in arranging money by the government, which is repeatedly struggling to meet its fiscal deficit targets, Dr. Subbarao had also suggested diluting government stake in banks below 51 per cent.

Dr. Rangarajan said given the large scale infusion needed into the 26 public sector banks, which handle over 70 per cent of the business between them, a long-term programme would have to be drawn up by the government.

If the government fails to re-capitalise, “the market share of the public sector banks will come down”, Dr. Rangarajan said, hinting at the bank’s potential inability to lend given the limited capital buffer. — PTI

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