Public sector banks (PSBs) might soon be exempted from paying dividends; instead the retained earnings of the lenders would be used to create a holding company for meeting the capital adequacy of the state owned lenders.

Currently, the PSBs pay out a 20% of net profit or paid up equity as a dividend to the government. The proposal of Pranab Mukherjee in his budget would go to the cabinet once approved by the finance ministry.

Country's largest bank, State Bank of India had recently announced a 350% dividend, which would bring Rs. 1,446.30 crore to the government given the 61.58% stake it owns in the bank.
"The retained earnings of all banks will be ploughed back to service the debt and the interest rate on debt, which this holding structure will raise for banks," said a ministry official.

The holding company may offer government backed long term bonds, the official added. The other options might include banks offering differential voting rights, which would require changes in Banking Regulation Act, and the chances of that happening are thin.

The banks would have to maintain a good margin to comply with the Basel III norms which would kick in from next fiscal. The budget had announced Rs. 15,888 crore capitalization support for the PSBs.