1. PSB recapitalisation: Narendra Modi government set to dictate terms to even the strongest lenders

PSB recapitalisation: Narendra Modi government set to dictate terms to even the strongest lenders

The government is considering making fresh capital infusion into public-sector banks (PSBs) under the recently announced Rs 2.11-lakh crore plan conditional for both weak and relatively strong banks, a senior official told FE.

By: | New Delhi | Published: November 7, 2017 5:51 AM
psb recapitalisation, public sector banks recapitalisation, new announcement for public sector So, less than a dozen of the 21 PSBs will have to sign agreements with the government, spelling out road map on efficient management of bad loans and strict turnaround and austerity plans, if they want fresh capital, said the official. (Reuters)

The government is considering making fresh capital infusion into public-sector banks (PSBs) under the recently announced Rs 2.11-lakh crore plan conditional for both weak and relatively strong banks, a senior official told FE. So, less than a dozen of the 21 PSBs will have to sign agreements with the government, spelling out road map on efficient management of bad loans and strict turnaround and austerity plans, if they want fresh capital, said the official. However, the 11 PSBs that already got into memoranda of understandings with the Centre earlier this year to receive capital won’t have to do so again, as their existing agreements will continue, the official added. Although Rs 25,000 crore was allocated to around a dozen PSBs in 2016-17 under the Indradhanush scheme, the government hadn’t imposed tough conditions for such an infusion. This fiscal, it asked 11 banks to sign the agreements for fresh capital but these were actually relatively small and weak banks. Once the Reserve Bank Of India (RBI) submits an assessment of capital requirements of various PSBs with the government, the rest of them may have to agree to similar and strict terms and conditions with the Centre if they want fresh round of infusion. Apart from management of non-performing assets (NPAs), these conditions include sale of non-core assets and closing of loss-making branches. Quarterly performance goals could be set and these will be monitored regularly. Austerity plans are mostly about tightening staff benefits, which include industry-standard wage hike and other perks and benefits such as leave travel concessions. However, if a bank marks a turnaround quickly, such benefits may be restored early as well. A tripartite MoU between the government, the relevant PSB and its staff has to be signed for the bank to receive capital. The lenders that already signed the agreements earlier this fiscal include Allahabad Bank, Andhra Bank, Bank of India, Bank of Maharashtra, Central Bank of India, Dena Bank, IDBI Bank, Indian Overseas Bank, UCO Bank, United Bank of India and Union Bank of India.

Already, chief economic adviser Arvind Subramanian has favoured selective and incentive-based capital infusion and suggested “recapitalising the unviable banks only to the extent necessary to finance their current balance sheet size while explicitly not providing for their growth”. If only relatively strong banks get growth capital, it could ultimately result in “stealth consolidation” where weak, small lenders would be easy targets of acquisition or be forced to consider mergers with other PSBs to acquire scale.

Of the Rs 2.11-lakh crore recapitalisation plan approved by the government last week, Rs 1,35,000 crore will be mobilised through recapitalisation bonds and around Rs 58,000 crore through the dilution of government equity in various PSBs. The government will provide a budgetary support of Rs 18,139 crore under the existing Indradhanush plan (excluding the Rs 1,861 crore already provided this fiscal). The infusion will be front-loaded.

Massive capital infusion into PSBs was necessitated as their gross NPAs surged from 5.4% of gross advances in March 2015 to 13.7% by June 2017. This led to a jump in their provisioning requirements from Rs 3,79,080 crore between FY15 and Q1FY18, much higher than the Rs 1,96,937 crore made during the preceding 10 years.

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