Recapitalisation is a Monumental Step: Urjit Patel

The government's proposed recapitalisation programme will help address banking sector challenges with increasing opportunities for investment and job creation, said Reserve Bank of India governor Urjit Patel in a statement. “For the first time in last decade, we now have a real chance that all the policy pieces of the jigsaw puzzle will be in place for a comprehensive and coherent, rather than piecemeal, strategy to address the banking sector challenges,“ Patel said.

Underlining the importance of well-capitalised or healthy banks, the RBI governor said, “It is only healthy banks that lend to healthy firms and borrowers, creating a virtuous cycle of investment and job creation.“

The Union Cabinet has approved a Rs.2.11-lakh-crore recapitalisation plan for public sector banks over the next two years. Of the corpus, recapitalisation bonds will account for Rs.1.35 lakh crore, while Rs.76,000 crore will be available through budgetary support. “The Government of India's decisive package to restore the health of the Indian banking system is in the view of the RBI, a monumental step forward in safeguarding the country's economic future,“ Patel said.

The mega plan triggered a surge in shares of state-owned banks, with Punjab National Banks soaring nearly 50% on the Bombay Stock Exchange in intraday trade on Wednesday. The country's largest lender, the State Bank of India, gained about 29%.

The package combines several desirable features, said the RBI governor. “It will involve participation of private shareholders of public sector banks by requiring that parts of the capital needs be met by market funding,“ he said.

The recapitalisation bonds, which the government will issue to banks, may marginally add to fiscal deficit since the government has to fork out interest cost to lenders. “The recapitalisation bonds will be liquidity neutral for the government except for the interest expense that will contribute to the annual fiscal deficit numbers,“ Patel said in the statement.“By deploying recapitalisation bonds, it will front-load capital injections while staggering the attendant fiscal implications over a period of time.“

The benchmark bond yield rose three basis points to 6.81%, pulling prices down in noon trade as jittery traders pruned some of their sovereign holdings in expectation of additional supply .

The banks which will subscribe to those bonds may sell them in the secondary market, a move that will release money for them and help expand their loan books.

It (recapitalisation) will allow for a calibrated approach whereby banks that have better addressed their balance-sheet issues and are in a position to use fresh capital injection for immediate credit creation can be given priority while others shape up to be in a similar position, said Patel.

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