LIC may Step in to Bail out Small Govt Banks

Recapitalisation move by public sector insurance co may help govt retain its holding in banks indirectly

Sandwiched between an urgent need for capital and a financially wreck 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 the 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 India with annual equity investments of about . 40,000 crore, will walk along with the government in capitalising the banks which are facing a rise in bad loans and demands for restructuring loans. 
The government, which is set to breach its own fiscal deficit target of 4.6% of the gross domestic product by a percentage point, has committed . 18,000 crore for recapitalisation of large banks 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 an executive with a bank that hasn't received any government commitment on capital. "The pricing will be based on a Sebi formula and therefore it does not leave any room for speculation." 
A government starved of resources and a weak equity market despite a 14% rise this year are hampering the fund raising plans of public sector banks. With the government unwilling to see its holdings fall, it is leaning on LIC to buy shares. This could be comforting for the government, which could indirectly retain its ownership of banks and without any stake dilution. 
"The expectation of equity injection provides some stability to the viability ratings of government banks, particularly as the base case stress scenarios do not envisage a loss for most Indian banks under the expected non-performing loans rise in 2012,'' Fitch Ratings said in a recent note. Dena Bank board meets on Monday to consider a share sale to insurance companies and government-sponsored mutual funds. Syndicate Bank, in which LIC holds over 10%, will consider a share sale to the government or others on February 11 . 
The government has so far allotted Rs 7,900 crore to SBI, Rs 1,285 crore to PNB and Rs 700 crore to Central Bank of India. Union Bank of India and Indian Overseas Bank too have received commitment on capital, but not the size of support.