The central government and the Reserve Bank of India are working on a recapitalisation plan for public sectors banks reeling under massive stressed assets, RBI governor Urjit Patel said on Saturday.
The central government and the Reserve Bank of India are working on a recapitalisation plan for public sectors banks reeling under massive stressed assets, RBI governor Urjit Patel said on Saturday. Pointing out that the state-run banks will need to take haircuts on current exposures under any resolution plan within or outside the Insolvency and Bankruptcy Code, Patel said higher provisioning requirement will affect the capital position of several banks. “This would necessitate a higher recapitalisation of these banks. The government and the Reserve Bank are in dialogue to prepare a packet of measures to enable the public sector banks to shore up the requisite capital in a time-bound manner,” Patel said at a conference on insolvency and bankruptcy in Mumbai. “Gross NPA ratio of the banking system at 9.6% and stressed advances ratio at 12% as of March 2017 is indeed a matter of concern,” Patel said. The measures under discussion could include raising of capital from the market, dilution of government holdings, additional capital infusion by the government, mergers based on strategic decisions, sale of non-core assets or a combination of the above steps.
In the Union Budget 2017-18, finance minister Arun Jaitley had allocated Rs 10,000 crore for recapitalisation of banks during the fiscal year in line with the Indradhanush roadmap. He had said additional allocation will be provided as required. Under the Indradhanush roadmap announced in 2015, the government had said it would infuse Rs 70,000 crore in state-run banks over four years, while the banks would have to raise a further Rs 1.1 lakh crore from the markets to meet their capital requirement in line with Basel-III norms. “The success and credibility of all the resolution efforts would be critically contingent on the strength of the public sector banks’ balance sheets to absorb the costs,” Patel said.
However, he urged the banks to be more proactive in the resolution of stressed accounts through the IBC mechanism. “We must, however, stress that the exercise of powers by the RBI vested in sections 35 AA and 35 AB cannot be a regular approach. The lenders have been adequately empowered by the IBC to take necessary actions upon default. It is now incumbent upon all lenders to effectively leverage these powers for proactive, timely action under IBC on their own,” Patel said.
In June, the RBI had said had said 12 accounts totalling about 25% of the Rs 8 lakh crore non-performing assets of the Indian banking sector would qualify for immediate reference under the IBC. Subsequently, Jyoti Structures, Essar Steel, Monnet Ispat and Energy, Alok Industries, Electrosteel Steels, Amtek Auto, Bhushan Steel, Bhushan Power and Steel, ABG Shipyard, Lanco Infratech and Jaypee Infratech have been admitted by the NCLT. At the end of the June quarter, the non-performing assets of 38 Indian banks increased 16.6% sequentially and 34.2% year-on-year to Rs 8.29 lakh crore, data from CARE Ratings showed.
Calling the enactment of the Insolvency and Bankruptcy Code 2016 a watershed move towards improving the credit culture in the country, Patel said, “The IBC in essence provides for a single-window, time-bound process for resolution of an asset.” Prior to the IBC, India had multiple laws without having the comprehensive legal framework envisaging a holistic approach applicable for troubled or defaulting companies, he added.
“The threat of liquidation, which could potentially result in larger losses for the creditors as a whole should be sufficient incentive for them to ensure efficient coordination during the insolvency resolution period so as to quickly arrive at a decision. For the promoters, the biggest cost of being pushed under IBC is the possibility of losing the firm to potential bidders, which should incentivise the firms to avoid default. This would improve the credit culture of the country,” Patel said.