Lifeline: public sector banks to get ₹70,000 cr over four years

Public sector banks (PSBs), saddled with bad debts, will get ₹70,000 crore over a period of four years, the Finance Ministry said. The first instalment of ₹25,000 crore has been marked for this fiscal.

It is “a good beginning”, according to RBI Governor Raghuram Rajan, who told reporters here that the allocation for recapitalisation in the first year is adequate. Rajan was here for his customary meeting with Finance Minister Arun Jaitley ahead of the third bi-monthly monetary policy on August 4.

Having provided ₹7,940 crore in this year’s Budget, the Finance Ministry has sought Parliamentary nod for an additional capital infusion of ₹12,010 crore through a Supplementary Demand for Grants. The remaining ₹5,000 crore will be provided in the second Supplementary Demand later this year.

The second instalment of ₹25,000 crore will be in 2016-17, followed by infusion of ₹10,000 crore each in the third (2017-18), and fourth (2018-19) instalments.

The capital infusion will take place as early as possible, said Financial Services Secretary Hasmukh Adhia. “It can happen by September after we get approval from Parliament,” he said.

As soon as the blueprint became public, PSB stocks saw a good rally in the market, with a few exceptions. State Bank of India closed at ₹270.40 with a gain of 5.25 per cent over Thursday’s closing price. Bank of Baroda jumped 5.34 per cent to close at ₹177.40. Canara Bank ( up 5.16 per cent) and Bank of India (up 4.09 per cent) also had a good day.

The basic purpose of capital infusion is to adequately capitalise all the banks to keep a safe buffer over and above the minimum norms of Basel III (a set of guidelines for a more resilient banking system, focusing on four vital banking parameters: capital, leverage, funding, and liquidity). According to government estimates, the requirement of extra capital for the next four years (up to 2018-19) is likely to be about ₹1.80 lakh crore.

“We are also presuming that the emphasis on PSB financing will reduce over the years by development of a vibrant corporate debt market and greater participation of private sector banks,” a Finance Ministry Statement said.

The Ministry blamed legacy issues for the surge in bad debts, including delays in various approvals as well as land acquisition hurdles and low global and domestic demand for strained projects. Subsequently due to provisioning for the restructured projects and gross non-performing assets, banks’ profitability was hit further, it said.

Now, the ministry estimates that PSBs’ market valuations will improve significantly due to a combination of factors such as governance reforms, tight NPA management and risk controls, significant operating improvements, and capital allocation from the Government.

“Improved valuations coupled with value unlocking from non-core assets as well as improvements in capital productivity will enable PSBs to raise the remaining ₹110,000 crore from the market,” the ministry said. The government has already decided to bring down its holding in PSBs to 52 per cent.