Fitch says Arun Jaitley’s bank recap plan may cut PSB risks but bad assets will impact sector performance

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Published: January 25, 2018 1:23:43 PM

With an aim to provide fillip for Public Sector Banks (PSBs) in the country, the Modi government will infuse a total of around Rs 1 lakh crore by March-end. This staggering amount comprises of Rs 80,000 crore which will be infused through recapitalisation bonds.

Budget 2018 is the focus of a lot of hope, anticipation, and anxiety all at the same time.Bank recap move by the Finance Ministry may cut risks of struggling public sector banks (PSBs), Fitch Ratings said.

With an aim to provide fillip for Public Sector Banks (PSBs) in the country, the Modi government will infuse a total of around Rs 1 lakh crore by March-end. This staggering amount comprises of Rs 80,000 crore which will be infused through recapitalisation bonds. Apart from this Rs 8,139 crore will be infused through gross budgetary support and Rs 10,312 crore of funds raised from the market. The bank recap move by the Finance Ministry may cut risks of struggling public sector banks (PSBs), but resolution of bad assets and continued high credit costs hinder the sector’s near-term performance, PTI reported Fitch Ratings saying on Thursday. The capital infusion “should help in part to mitigate the risks that Indian state banks face on account of weak asset quality and poor earnings,” Fitch said. But, unwinding of these risks will take some time, “implying that resolution of bad assets and continued high credit costs will hinder the sector’s near-term performance,” Fitch said maintaining its negative sector outlook to reflect these pressures. It said the average core capitalisation for the state banks would be likely to reflect a cumulative increase of around 140 basis points.

In a report released today, Fitch said recapitalisation is “short of enabling the banks to meet higher regulatory capital burdens under Basel III in the face of persistent weak earnings.”.The total amount is around 30 percent of the state banks’ equity base and is a significant shift away from the earlier drip-feed approach. The Modi government will infuse a total of around Rs 1 lakh crore by March-end in struggling public sector banks. This staggering amount comprises of Rs 80,000 crore which will be infused through recapitalisation bonds. Apart from this Rs 8,139 crore will be infused through gross budgetary support and Rs 10,312 crore of funds raised from the market. An announcement was made in this regard yesterday. The central government had come up with a reforms roadmap for these banks. It has been learnt that eleven weak banks are to be given a total of Rs 52,311 crore to maintain their minimum capital requirement. Nine strong banks will get Rs 35,828 crore. The eleven weak banks are currently under the RBI’s Prompt Corrective Action (PCA)0.

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