Government plans to cut stake in state lenders to raise $14.4 billion

By Manoj Kumar

NEW DELHI (Reuters) - The government plans to raise about 891.2 billion rupees ($14.4 billion) by reducing its stakes in state-run banks to 52 percent, the junior finance minister said on Friday, sending shares of state lenders higher.

The government holds stakes ranging from 56 percent to 84 percent in 24 state-run banks that account for 70 percent of total outstanding loans of about $1 trillion in Asia's third-largest economy.

The state-run lenders are estimated to need as much as $60 billion in capital over the next four years to meet upcoming global regulations and to build a buffer against rising bad loans.

While the Indian government has traditionally funded the state lenders - to the tune of about $13 billion over the past decade - it is now striving to reduce the capital injections to lower its budget deficit.

Cutting its stakes "would substantially reduce the requirement of budgetary provision for infusion of capital in public sector banks," Jayant Sinha told parliament in a written statement.

Bank shares, which were trading higher before the news as the market bets on an interest rate cut next week, extended gains. The index of state lenders rose as much as 5.8 percent to its highest level in more than 3-1/2 years.

Top lender State Bank of India (SBI) rose as much as 5.3 percent, while second-largest Bank of Baroda (BOB.NS) jumped 8.3 percent.

Finance ministry officials say the federal cabinet is expected to take a final decision on the issue of stake sale soon. A bunch of state lenders including SBI are awaiting the government's approval to sell shares to raise capital.

Analysts say bigger state-run banks have a better chance to raise capital from the market, but remain sceptical of smaller lenders' ability to attract investors.

State-run banks have been burdened by high bad debt levels and corporate governance issues. A central bank-appointed panel this year recommended the government cut its stake in state lenders to below 50 percent.

($1 = 61.9200 rupees)

(Writing and additional reporting by Devidutta Tripathy; Editing by Sanjeev Miglani & Kim Coghill)