Bank recap update

The government announced it will give ₹88,000 crore of capital to 20 state-run banks in the current fiscal while prescribing a reforms package to make them more accountable. Of this, ₹80,000 crore will be through recapitalisation bonds and ₹8,139 crore as budgetary support while banks will raise ₹10,312 crore from the market.

Apart from ensuring customer service levels and responsible banking practices, lenders will have to monitor loans, keep a close eye on bad debt and sell non-core assets.

The package has six themes with 30 action points, the government said in a press release.

“The reform agenda is aimed at EASE — Enhanced Access and Service Excellence — focusing on six themes of customer responsiveness, responsible banking, credit offtake, PSBs as Udyami Mitra, deepening financial inclusion and digitalisation and developing personnel for brand PSB,” the government said. “The overarching framework for the reforms agenda is Responsive and Responsible PSBs.”

Banks will need to set up specialised monitoring agencies for loans above ₹250 crore and a separate vertical for NPAs, apart from selling non-core assets and rationalising overseas businesses. They also need to have a minimum 10% exposure in consortium loans to prevent a situation in which too many lenders are involved when it comes to debt resolution.

Eleven banks that are currently under the Reserve Bank of India’s prompt corrective action  programme because of their bad loan burden will together get ₹52,311 crore to meet regulatory capital requirements while nine performing banks will get ₹35,828 crore to allow them to pursue growth.

The finance ministry said the capital support will enable banks to lend more than ₹5 lakh crore.

“This plan addresses regulatory capital requirement of all PSBs and provides a significant amount towards growth capital for increasing lending to the economy,” it noted in a statement.

IDBI Bank, the state-run lender with the highest non-performing assets, gets the maximum ₹10,610 crore to maintain regulatory capital, followed by Bank of India which gets ₹9,232 crore. Among the performing banks, State Bank of India will get ₹8,800 crore.

“This announcement is credit positive for all public sector banks, and especially the weaker ones,” ratings agency Moody’s said in a statement.

Finance minister Arun Jaitley said the government’s objective was to find robust solutions and strengthen institutions so that mistakes were not repeated.

“The entire objective of this exercise has been that it is the government's prime responsibility to keep PSBs in good health,” he said.

Financial services secretary Rajiv Kumar said EASE would boost credit offtake. “This would facilitate lending and also put checks and balances on borrowers who were misusing this system.”

Gross non-performing assets of public sector banks rose to 12.47% at the end of March 2017 from 4.72% at the end of March 2014.

The Rs.80,000-crore bond issuance will be a cash-neutral swap deal between the lenders and the government. In exchange for bonds, the government will get shares of banks, a transaction that will not have an impact on the fiscal deficit.

Department of economic affairs secretary Subhash Chandra Garg said the bonds will have a 10-15 year tenure and will not be eligible for SLR status. This means they will not count toward mandatory investment in government bonds by banks.

The infusion is part of the Rs 2.11 lakh crore plan announced last October.

The government will provide Rs.1.35 lakh crore through recapitalisation bonds, while the banks will need to raise another Rs.58,000 crore on their own. The balance will come from the budget.

Jaitley, however, noted that consolidation among PSBs is independent of this capital allocation. He also said that the government has not shelved its proposal to privatise IDBI Bank.

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