Public sector banks have found a novel way of reducing government stake. Even though none of them have gone for a second public float, they are paring the government's holding through the back door -- by returning government capital.

The Oriental Bank of Commerce plans to return Rs 50 crore (Rs 500 million) capital to the Centre, bringing down the government's stake from 66.50 per cent to 54 per cent -- the lowest ever government holding in any public sector bank.

Andhra Bank returned Rs 50 crore capital on March 27, reducing its share capital to Rs 400 crore (Rs 4 billion). This has bought down the government's stake from 66.67 per cent to 62.5 per cent. It now plans to return another Rs 50 crore, thereby reducing the Centre's stake to 57.14 per cent.

At present, the government's stake is the lowest in Corporation Bank at 57.17 per cent.

Analysts said the government stake will soon go down to 51 per cent in most listed banks that have been returning capital to the government. This may force the government to reduce its stake to 33 per cent, as planned.

The issue of reducing the Centre's stake in banks to 33 per cent from 51 per cent has been lying with the Parliamentary committee for approval for the last few years.

Since the government's stake in most banks has been around 65 per cent, there seems to be no hurry to bring down its stake to 33 per cent.

The banks which have returned government capital or are in the process of doing so include Andhra Bank, Oriental Bank of Commerce, Vijaya Bank, Syndicate Bank and Bank of Baroda.

"In the next two years, banks will have to spend a lot of money on the technology front and increase provisions on the back of new Basle Committee recommendations. They will have to go in for a rights issue or a public issue the next time they want to raise capital. The government will then have no option but to bring down its stake to less than 51 per cent. By taking this (returning capital) route, banks are forcing the government to reduce its stake," said market observers.

A couple of Banks like Canara Bank and Indian Overseas Bank are planning a second public issue to reduce the Centre's stake. IOB is also looking at returning Rs 50-75 crore (Rs 500-750 million) to the government.

BoB is likely to take a decision soon on returning capital to the Centre. At present, Centre's stake in BoB is 66.22 per cent.

Payback time

• Oriental Bank plans to return Rs 50 crore capital to the Centre.
• Andhra Bank returned Rs 50 crore capital on March 27.
• Analysts expect government stake at 51% in most listed banks.