Government takes “bold” step; approves 2.11 lakh crore for recapitalisation of public sector banks as bad loans soar

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Updated: October 24, 2017 5:44:27 PM

The cabinet has approved an unprecedented public sector bank capitalisation of Rs 2.11 lakh as one of the many steps being taken to bring in reforms in the country's ailing banking system.

The cabinet has approved an unprecedented public sector bank capitalisation of Rs 2 lakh 11 thousand, the Finance Ministry said today. Calling the step as “bold”, Finance Minister Arun Jaitley said it was one of the many steps being taken to bring in reforms in the country’s ailing banking system. Of the 2.11 lakh crore, 1.35 lakh crore would come from recapitalisation bond. 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. However, unlike the 1990s, the recap bonds will not be converted to government securities.

“It was decided that a bold step needs to be taken by the government to recapitalise banks,” Arun Jaitley said while addressing a press conference on Tuesday. “Between 2008 and 2013, public sector banks engaged in indiscriminate lending, which led to the rise in non-performing assets,” he added. The rest 76,000 crore of the total allocated 2.11 lakh crore would come from other sources, Arun Jaitley said.

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.

Recapitalization is a type of corporate reorganization involving a substantial change in a company’s capital structure. Finance Minister Arun Jaitley had expressed concern about the ailing banking sector in India, saying rebuilding capacity of banks is government’s top agenda. During his week-long visit to the United States, Finance Minister  Arun Jaitley said the Indian government is working on a plan to rebuild the capacity of the banking sector so that it could support growth. “We need to rebuild the capacity (of the banking sector),” Jaitley had said at Harvard  University in Boston.

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 is one way to do that (but) it should not be done piecemeal, it should come in one go; it should come with a business plan for all the banks.” He also advised banks to try to consolidate some of its debt.

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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