90s formula to fix banking system in 2017; government approves Rs 1.35 lakh crore from recapitalisation bonds

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Updated: October 24, 2017 6:49 PM

Finance Minister Arun Jaitley on Tuesday said that the cabinet has approved Rs 1.35 lakh crore for India's ailing public banking system from recapitalisation bonds.

PSBs stake sale, sale of PSBs stake, public sector banks, banks in india, Punjab & Sind Bank, United Bank of India, Indian Bank, Bank of Maharashtra, Central Bank of India, Basel III banking rulesFinance Minister Arun Jaitley on Tuesday said that the cabinet has approved Rs 1.35 lakh crore for India’s ailing public banking system through recapitalisation bonds. (Image: Reuters)

In a major announcement, Finance Minister Arun Jaitley on Tuesday said that the cabinet has approved Rs 1.35 lakh crore for India’s ailing public banking system from recapitalisation bonds, of the total approved 2.11 lakh crore. Recap Bonds are used as payment for the shares bought by the government to ailing banks in a bid to raise their capitals. Earlier in the 90s, the then government had issued recap bonds to borrow from the banks without allowing fiscal deficit to expand.

The cabinet has approved an unprecedented public sector bank capitalisation of Rs 2.11 lakh crore. Of this, Rs 1.35 lakh crore will come from recap bonds, while 76,000 crore will come from budgetary allocations and market, Finance Minister Arun Jaitley said on Tuesday while addressing a press conference. Calling the decision as “bold” Arun Jaitley said, “Between 2008 and 2013, public sector banks engaged in indiscriminate lending, which led to the rise in non-performing assets.” “It was decided that a bold step needs to be taken by the government to recapitalise banks,” he added.

The banking sector fears accretion of more than Rs 40,000 crore of bad loans to its books following recent classification of eight consortium accounts of  Axis Bank as non-performing assets (NPA) by the RBI, PTI reported. India’s total bad loans have hit a record high of 9.5 lakh crore at the end of June  2017, according to Reuters. In India, power, steel, road infrastructure and textiles sectors are the biggest loan defaulters of state-owned banks.

SBI’s newly appointed Chairman Rajnish Kumar has strongly advocated for the recapitalisation of banks and said it should not be done piecemeal. In an interview with ET Now, the newly appointed Chairman of India’s largest bank said, “Recapitalisation is the need of the hour. Recapitalisation bonds are one way to do that (but) it should not be done piecemeal…. You had recapitalisation bonds for the banks in 1995, and that was a 20,000 crore programme. In terms of time-value money even 100, 000 crore would not look much.” Earlier in August, Reserve Bank Governor Urjit Patel had called for the recapitalisation of state-run banks to help them resolve the NPAs issue in a  time-bound manner, saying that bad loans at 9.6% of the system were not acceptable.

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