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Govt to infuse over Rs 88,100 cr in state-run banks under recapitalisation plan

The PSBs are faced with mounting non-performing assets (NPAs) or bad loans, putting the financial sector under stress, and need to be recapitalised.

business Updated: Jan 24, 2018 23:54 IST
Remya Nair and Alekh Archana
Remya Nair and Alekh Archana
Mumbai/New Delhi, Livemint
Bank recapitalisation,Punlic banks,Non performing assests
Union finance minister Arun Jaitley during a press conference in New Delhi on Wednesday. (PTI Photo)

The government on Wednesday formally kicked off banking sector reforms, linking ₹88,000 crore of capital infusion in ailing public sector banks with a set of performance metrics.

State-run banks will have to revamp their lending practices, especially in advancing loans to big businesses and in consortium lending, monetise non-core assets, rationalise overseas branches, embrace technology and move to recover loans that have turned bad, said financial services secretary Rajiv Kumar.

The strategy is to provide a lifeline to banks struggling under the legacy of bad loans so that they can once again resume commercial lending—and revive the investment cycle in the economy.

Addressing a press conference, finance minister Arun Jaitley said the need for reforms is independent of the government’s stated objective of encouraging consolidation in the banking sector. “We are setting up an institutional mechanism to ensure what has happened in the past is not repeated. It is the government’s responsibility to keep state-run banks in good health and ensure they follow the highest standards of corporate governance,” Jaitley said.

State-run banks will be capitalised in the current fiscal year through a mix of recapitalisation bonds (Rs 80,000 crore) and direct infusion from budgetary allocations (Rs 8,139 crore). In addition, banks have raised more than Rs 10,000 crore so far and will raise more in the coming months from the market, taking the total recapitalisation to over Rs 1 lakh crore this fiscal.

The recapitalisation bonds will be of a tenure of 10-15 years and will be issued once the boards of banks commit to the reforms. The recapitalisation bonds will not impact the fiscal deficit this year, said Subhash Chandra Garg, secretary, department of economic affairs.

However, servicing the bonds would reflect in the future liability of the Union government, Garg clarified. It will be a cash-neutral arrangement and the bonds will be priced at the average 3-month yield of the corresponding government security plus spread.

Banks placed under prompt corrective action (PCA) by the Reserve Bank of India like IDBI Bank Ltd and Bank of India will receive the highest capital infusion from the government at Rs 10,610 crore and Rs 9,232 crore, respectively.

Banks not under the PCA framework like State Bank of India and Punjab National Bank will get Rs 8,800 crore and Rs 5,473 crore, respectively, as the government looks to support their growth. PCA framework acts as an early warning exercise and facilitates corrective measures by banks to restore their financial health.

Unveiling the action point for banking reforms, the government said banks should have a minimum of 10% exposure in big consortium loans to ensure a greater say; at present, small banks have very little exposure and, consequently, little or no influence.

First Published: Jan 24, 2018 18:08 IST