New Delhi, Dec. 10: The Union cabinet today allowed state-run banks to meet their high capital requirements by diluting the government's holding in them by up to 52 per cent in a phased manner.

Banks can raise up to Rs 1,60,825 crore through the dilution, but it is unlikely that they will do so at one go. Eventually, the government stake will be brought down to 52 per cent but in a phased manner over several years.

'The quantum of capital support needed by banks is huge, which cannot be funded by budgetary support alone,' an official statement said, explaining the decision taken by the cabinet, headed by Prime Minister Narendra Modi.

Finance minister Arun Jaitley had earlier said that state-run banks would require recapitalisation to the extent of Rs 2.4 lakh crore by 2018 to meet Basel III norms.

The cabinet has asked the state-run banks to broadbase retail shareholding while going in for the fund raising.

Out of 27 public sector banks (PSBs), the government controls 22 through a majority holding. In the remaining five banks, state-run State Bank of India holds a majority stake.

'If the PSBs are permitted to bring down the government's holding to 52 per cent in a phased manner, they can raise up to Rs 1,60,825 crore from the market,' the statement said.

The Basel III norms, which will come into effect from March 31, 2019, were put in place following the 2007-08 financial crisis triggered by the fall of the Lehman Brothers.

The norms are aimed at improving risk management and governance while raising the banking sector's ability to absorb financial and economic stress.

The total support provided to PSBs towards capitalisation during the past four years was Rs 58,634 crore, the statement said, adding the provision for the current year is at Rs 11,200 crore. The total market cap of the government's shareholding as in May 2014 stood at over Rs 4.19 lakh crore.

There are over two dozen PSBs and the government holds between 56.26 per cent and 88.63 per cent in them.

The government's budgetary support needed for 2015-19 would be Rs 78,895 crore, which will maintain its holding at 52 per cent, the statement said.

However, as the government is likely to receive an amount of Rs 34,500 crore from PSBs as dividend, the net outgo will only be Rs 44,395 crore, it added.

'Going by past trends if we take average GDP growth rate for the next five years as 6.5 per cent and dividend pay-out ratio as 20 per cent, as percentage of net profit, or 0.80 of risk weighted assets (RWAs), and credit growth rate at 18 per cent and further RWAs growth at 16 per cent, the total capital would be over Rs 4.60 lakh crore,' the statement said.