2.11 trillion PSU bank recapitalization plan announced by the Government

The finance ministry announced Rs.2.11 trillion bank recapitalization plan for all the state owned ledgers which were weighed down by the bad loans. This is an attempt to stimulate the flow of credit in order to spur private investment. This move would ensure genuine borrowers get adequate funding. The Government is also seeking to kickstart the private sector investment cycle in order to boost the Indian economy which grew 5.7% in the June ended quarter, which is the slowest in the last three years.

Out of the 2.11 trillion commitment, Rs.1.35 trillion will come from the sale of recapitalization bonds. The remaining Rs.76,000 crore will come through budgetary allocation and fundraising from the markets. The package makes a sharp increase over the current budgetary allocation. The government has allocated RS.20,000 crore for bank recapitalization under the Indradhanush plan for the current year and next fiscal years. The state of Indian banks is stressful; they are sitting on an asset pile close to Rs.10 trillion which has crimpled their ability to give fresh loans. Out of the Rs.10 trillion, gross non-performing assets account for Rs.7.7 trillion and the balance are restructured loans.

Experts consider this method of capital infusion as the best option considering the current fiscal position of the Government and the huge bank recapitalization requirements. Not all public sector undertakings are in a position to tap the market given the asset quality issue. The Government had sold such bonds in 1990s in order to recapitalize banks. It was a cash neutral route where banks sold their shares through right issue to the government and the government sold the bonds to the banks.

Finance minister Arun Jaitley mentioned that the government will stick to the ‘glide path’ for the fiscal deficit and the impact of recapitalization bonds on the fiscal position will depend on the issuing agency. The budget has set a fiscal deficit target of 3.2% of the GDP for the financial year. There will be takers for the instruments, but the rate on the bonds will depend on what route is used to sell them. Many public sector banks require capital not only to meet the regulatory minimum capital requirements but also for the cleaning up of their balance sheets. This would force them to set aside additional money to cover the bad loans. These funds will help in efficient management of risk and credit capital related requirements of banks.

Such steps will also encourage private participation which will boost growth going forward. The thrust to infrastructure will generate direct as well as indirect cascading effects for various related sectors and will create feel good factor for many stakeholders. The credit growth in the banking system was sluggish for some quarters due to the lack of demand for big ticket corporate loans. This was also result of weak capital position of the banks as it restricted their ability to lend. At present, banking sector’s credit growth stood at 7% year on year.

Experts in the industry are of the opinion that banks require much more capital than the budgetary allocation.