Raising a toast to the government’s ₹2.11-lakh crore recapitalisation plan for public sector banks, Reserve Bank of India Governor Urjit Patel said it is a decisive package to restore the health of the Indian banking system and a monumental step forward in safeguarding the country’s economic future.

“For the first time in the 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.

“It bodes us well that this step has been taken in a time of sound macroeconomic conditions for the economy on other fronts,” Patel said in a statement.

The government on Tuesday decided to capitalise public sector banks (PSBs) to the tune of ₹2.11-lakh crore in a frontloaded manner to support credit growth and job creation. This announcement has come at time when PSBs are capital starved and hobbled by non-performing assets.

The plan entails mobilisation of capital through budgetary provision of ₹18,139 crore, government issuing recapitalisation bonds worth ₹1.35 lakh crore, and the balance through raising of capital by banks from the market (estimated potential ₹58,000 crore), with dilution of government equity.

Patel observed that the proposed recapitalisation package combines several desirable features. First, by deploying recapitalisation bonds, the government will front-load capital injection while staggering the attendant fiscal implications over a period of time.

“As such, the recapitalisation bonds will be liquidity neutral for the government, except for the interest expense that will contribute to the annual fiscal deficit numbers,” he elaborated.

Second, the recapitalisation will involve participation of private shareholders of PSBs by requiring that parts of the capital needs be met by market funding.

“Last but not the least, it 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.

“This provides for a good way of bringing some market discipline into a public recapitalisation programme compared to the past recapitalisation programmes,”explained Patel.

Emphasising that a well-capitalised banking and financial intermediation system is a prerequisite for stable economic growth, the Governor said economic history has shown repeatedly that it is only healthy banks that lend to healthy firms and borrowers, creating a virtuous cycle of investment and job creation.

“Financial sector policies should support growth while maintaining financial stability. On behalf of the RBI, I commend the government on its bold steps in this direction, starting with implementation of the Insolvency and Bankruptcy Code that is helping resolve the underlying corporate stress, and culminating in yesterday’s announcement of the public sector bank recapitalisation programme,” said the Governor.

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