BANKS RECAPITILISATION. Reform measures, performance will be touchstones for funds release

The government on Wednesday announced plans to infuse ₹88,139 crore as capital in public sector banks, allocating over ₹10,000 crore to IDBI Bank.

The capital infusion, which includes ₹80,000 crore through recapitalisation bonds, ₹8,139 crore as budgetary support and another ₹10,312 crore by market-raising by banks. The funds will, however, have to be accompanied by strict reform measures and will be based on performance of banks.

“This plan addresses regulatory capital requirement of all PSBs and provides a significant amount towards growth capital for increasing lending to the economy,” said Finance Minister Arun Jaitley.

Noting that lending by banks has already begun to show an improvement, Financial Services Secretary Rajeev Kumar said that the government expects the capital infusion to enhance the additional credit off take capacity of state-owned banks by ₹5 lakh crore.

The move comes after the government unveiled plans to infuse ₹2.11 lakh crore capital in public sector banks that have been staring at mounting bad loans pegged at ₹6.9 lakh crore at the end of September 2017.

The capital infusion would be done over two years – 2017-18 and 2018-19, Jaitley said. The government has already taken ₹80,000 crore additional funds in the third supplementary demand for grants earlier this month.

Kumar said public sector banks would have to first accept and adopt the reforms package called EASE or Enhanced Access and Service Excellence that was finalised during the two-day banking Manthan . This would be aimed at six themes of customer responsiveness, responsible banking, credit offtake, PSBs as Udyami Mitra, deepening financial inclusion and digitalisation and developing personnel for brand PSB.

According to the capital infusion plan for this fiscal, State Bank of India will get ₹8,800 crore capital and Bank of India, ₹9,232 crore while IDBI would receive ₹10,610 crore. Indian Bank has been excluded as it does not require capital, Kumar said. The Finance Ministry also stressed that the recapitalisation bonds will not have an impact on the Centre’s fiscal deficit as they will be a cash neutral arrangement but will add to its liabilities.

Giving details of the bonds, Economic Affairs Secretary Subhash Chandra Garg said they will have non-SLR status and will be non-tradeable.

The bonds will be issued in six tranches with tenure of 10 to 15 years. The return is expected to be calculated based on the three-month average price of government securities and spread.

Experts welcomed the capital infusion but remained cautious about the impact of the reforms.

“Is a credit positive for all the public sector banks, and especially the weaker ones… While some of these (reforms) changes are steps in the right direction, we do not judge them to be meaningful enough to address the structural corporate governance issues facing these banks,” said Srikanth Vadlamani, Vice-President, Financial Institutions Group, Moody’s Investors Service.

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