Banking reforms: Recap funds with riders – Consortium norms changed, smaller banks must diversify

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New Delhi | Published: January 25, 2018 6:50:21 AM

The frontloading of recapitlisation of public sector banks (PSBs) — bonds worth Rs 80,000 crore of the total Rs 1.35 lakh crore planned will be issued this fiscal — has come with a set of inviolable dos and dont’s, constituting significant reforms in the banking sector.

banking reforms, consortium norms, smaller banks, public sector banks, recapitlisation of public sector banksAs per the plan unveiled by the government on Wednesday, growth capital will be provided to only relatively strong PSBs while stressed PSBs would get just about enough capital to meet regulatory requirements. (Image: Reuters)

The frontloading of recapitlisation of public sector banks (PSBs) — bonds worth Rs 80,000 crore of the total Rs 1.35 lakh crore planned will be issued this fiscal — has come with a set of inviolable dos and dont’s, constituting significant reforms in the banking sector. As per the plan unveiled by the government on Wednesday, growth capital will be provided to only relatively strong PSBs while stressed PSBs would get just about enough capital to meet regulatory requirements. The government also capped the minimum exposure of a PSB in consortium lending at 10%, which will allow only a few of them, mainly the strong ones, to participate in financing large projects. This means small and weak PSBs can’t just ride on the stronger ones for lending to large projects; instead, they have to generate their own businesses and scout for alternate sources of lending that suit their size and portfolio. Without growth capital from the government, weaker banks will be required to focus more on recovery, closure of non-core business and operational efficiency to gather enough capital to lend adequately, financial services secretary Rajiv Kumar told FE. Also, he said, banks will have to separate the sections appraising a loan from those monitoring it and the recovery teams, so that greater efficiency and objectivity could be achieved and the recovery process is prompt under designated cells encouraged with incentives. The government will follow a “liquidity-neutral” model of recapitalisation bonds whereby PSBs would sell their shares to the government, which would, in turn, issue dated securities, with duration of 10-15 years, to the banks, economic affairs secretary Subhash Chandra Garg said.

Bank stocks gained in anticipation of the news while the bond market was mostly unaffected as the government clarified the recap bonds will not have statutory liquidity ratio (SLR) status, soothing fears of a supply overhang. Yield on the new benchmark bonds — the 7.17% yielding notes maturing in 2028 —closed three basis points higher on Wednesday at 7.28%. Similarly, the yield on the old benchmark bonds —the 6.79% yielding notes maturing in 2027 — closed four basis points higher at 7.45%. All capital infusion will be tied to strict performance goals, incorporating 30 action points on operational efficiency, portfolio diversification, smoother lending to small and medium enterprises and strict risk monitoring to avoid such a massive pile-up of bad debts in future. Finance minister Arun Jaitley said stringent norms for disbursal of high-value loans have been framed, with strict surveillance on big loan defaulters and mandatory reporting of loans of over Rs 250 crore.

He also said the original decision on the privatisation of IDBI Bank stands but “there is always a time for implementing a decision”. “One of the objectives in supporting the non-Prompt Corrective Action banks has been that these are the banks where robust lending has to take place so that they are able to support growth, lending and the economy itself,” the minister said. Although closure of loss-making domestic branches is yet to be made mandatory for the PSBs, they will have to rationalise overseas operations, with 41 operations abroad having already been identified for either closure or merger. “The pricing of the recap bonds would be more or less based on three months’ average plus some spread,” Garg said, adding it could be less than 8%. Garg also said they won’t be traded, indicating the securities could be held to maturity. These securities will be issued in six slots. Once the PSBs sign agreements with the government by committing themselves to the stipulated reforms, the bonds will be rolled out.

For now, the government will have to offer interests to these banks on these bonds from the Budget (the interest outgo will reflect from next fiscal). The overall bond issuance amount will be part of its off-budget liabilities, which will reflect in its debt burden — to avoid worsening the already-tight fiscal scenario. The government’s share in the PSBs will rise accordingly after the issuance of the bonds, while PSBs’ capital adequacy — or their capital to risk-weighted assets and liabilities — will shore up due to their ownership of these securities, enabling them to make adequate provisions for stressed assets as well. An interest cost of Rs 8,000 crore per year (on the total bond issue of Rs 1.35 lakh crore) is only 0.07% of GDP and 1.6% of the total interest payment on revenue expenditure of the government, according to Soumya Kanti Ghosh, group chief economic advisor at SBI. And the impact on public debt is just 0.8% of GDP, he added. To nudge PSBs to diversify their portfolio better to reduce risks, the government said business plan, including asset swap/sale plan to achieve desired risk weighted asset mix, with limited corporate exposure (about 25% of total risk-weighted assets) and initial reduction of corporate exposure share by March 2019 to below 40% or by at least 15% from September 2017 level.

Of the proposed Rs 2.11 lakh crore capital infusion package over two years through 2018-19, the government intends to issue recapitalisation bonds worth Rs 80,000 crore this fiscal and offer budgetary support of another Rs 8,139 crore through the existing Indrandhanush plan. PSBs are expected to raise at least Rs 10,312 crore from the market this fiscal. Whole-time directors of PSBs would be assigned theme-wise reforms for implementation and their performance in this regard would be evaluated by the Board of the banks. A survey by an independent agency in respect of EASE (Enhanced Access and Service Excellence) would be conducted to “measure public perception about improvements in access and service quality”, the financial services secretary said. Results of the survey shall be made public each year.

“Taken together, the recapitalisation and reform agenda is sharply focused on strengthening PSBs, increasing lending to MSMEs and making it easier for MSMEs and retail customers to transact as well as significantly increasing access to banking services,” he said. It includes a commitment to banking services within 5 km of every village and refund within 10 days of any unauthorised debit in electronic transactions, a mobile app for locating banking outlets and a mobile ATM in every underserved district. Krishnan Sitaraman, senior director at CRISIL Ratings, said: “The government’s explicit note asking public sector banks to become more MSME-friendly is an important step, given the footprint and role of small enterprises.” With formalisation of the economy gathering pace after GST, assessing MSME creditworthiness, which has been somewhat challenging for banks in the past, can become easier through data analytics and adequate risk practices, Sitaraman said.

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