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FY18 supplementary demand: Government seeks Rs 80k cr to issue recapitalisation bonds

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New Delhi | Published: January 5, 2018 6:53:23 AM

In the first concrete step towards an unprecedented capitalisation of public sector banks (PSBs) reeling under massive bad loans, the government on Thursday told Parliament it will infuse Rs 80,000 crore into these lenders this fiscal through the proposed recapitalisation bonds.

supplementary demand, issue recapitalisation bonds, recapitalisation bonds, public sector banks, bad loans, massive bad loansNo cash out-go involved, to avoid straining fisc; muted impact on bond market likely; bank stocks surge. (Image: Reuters)

In the first concrete step towards an unprecedented capitalisation of public sector banks (PSBs) reeling under massive bad loans, the government on Thursday told Parliament it will infuse Rs 80,000 crore into these lenders this fiscal through the proposed recapitalisation bonds. With this, the government will front-load in this fiscal almost 60% of the proposed bond issuance worth Rs 1.35 lakh crore over two years through FY19. The news drove up stocks of PSBs on Thursday. Shares of Punjab National Bank gained almost 6%, while those of State Bank of India, Canara Bank and Bank of India rose 1.72%, 2.69% and 3.83%, respectively, outperforming a 0.52% increase in the Sensex. The benchmark 10-year bond yield moved little on Thursday to close at 7.33%. The broad contours of the bonds will soon be announced. An official source said on Thursday these securities would have a non-SLR (statutory liquidity ratio) status and will be non-tradeable initially. After taking into account the additional receipts on issue of securities to PSBs, the infusion doesn’t entail a cash outgo, the government said while placing the third batch of supplementary demands for the current fiscal. FE had first reported on October 30 that the government was looking at a “liquidity neutral” model of recapitalisation whereby PSBs would sell their shares to the government, which would, in turn, issue dated securities to the banks. Official sources had also said the trading of such long-duration bonds was unlikely to be allowed initially to prevent any wide-scale disruption in the bond market, although the banks would be permitted to sell these later and realise proceeds. The government had issued similar bonds in the 1990s, which became marketable in 2006-07. 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 PSBs will rise accordingly after the issuance of the bonds, while PSBs’ capital adequacy — or their capital to risk-weighted assets and liabilities — will be shored up due to their ownership of these securities, enabling them to free up extra capital for lending and making adequate provisions for stressed assets. An interest cost of `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 adviser at SBI. And the impact on public debt is just 0.8% of GDP, he added. The 67% spike in bond yields in Q3 will leave banks with a big hole in banks’ treasury portfolios and could result in mark-to-market losses of Rs 15,500 crore in the December quarter alone, an ICRA report has warned. Around 80% of these losses are slated to be absorbed by state-run lenders, further eroding their core capital. So the government may have to rework its recapitalisation math, it added.

The infusion and subsequent balance-sheet clean-up are expected to substantially raise the valuation of PSBs and help the government mop up more when it decides to dilute its shares in them at a later date. Also, a better decision about mergers can be taken by the respective boards of potential candidates. Speaking in Parliament, finance minister Arun Jaitley said: “The bail-out isn’t a very ideal situation in itself but since PSBs are backed by the government, it becomes a sort of legal and moral responsibility for us to keep them alive. This is why we announced a Rs 2.11-lakh-crore recapitalisation plan.” “The idea is to ensure that the banks’ ability to support growth doesn’t weaken. Reckless lending of the past and inadequate risk management had affected the banks’ ability to lend. That also contributed to a slowdown in private investments,” he added.

According to an SBI report, between 1986 and 2001, when the government had infused a total of Rs 20,446 crore into PSBs, the interest paid by it to the nationalised banks on recapitalisation bonds worked out to an average of 0.07% of GDP a year. But the banks’ average dividend payments to the government was 0.04% of GDP during this period. “So, the net impact was only 0.03% of GDP on fiscal deficit, almost nil,” it said. As part of the Rs 2.11-lakh-crore recapitalisation plan, approved by the Cabinet in late October, Rs 1,35,000 crore will be mobilised through the issuance of recapitalisation bonds and around Rs 58,000 crore by the dilution of government equity in various PSBs. The government will provide a budgetary support of Rs 18,139 crore under the existing Indradhanush plan (excluding the close to Rs 1,900 crore already provided until then). Much of the proposed infusion of the mobilised capital will be front-loaded, possibly over the next four quarters. The government recently approved a proposal to infuse Rs 7,577 crore into six weak PSBs as part of the Indradhanush plan.

A Moody’s Investors Service report said on Thursday the implementation of the proposed Rs 2.11-lakh-crore recapitalisation plan will narrow the gap between the capital profiles of Indian public and private sector banks. As of September 2017, the average common equity tier 1 (CET1) ratio of rated PSBs was 8.7%, compared with 12.2% for the rated private sector banks, it said. “While details on capital allocations to individual banks are lacking at this stage from a top-down perspective, Moody’s expects the government will allocate the INR1.5 trillion in capital across the country’s 21 public sector banks so that they will all have common equity tier 1 (CET1) ratios above the minimum Basel III requirement of 8% by the end of March 2019, which is the end of fiscal 2019,” it said.

According to Moody’s Indian affiliate Icra, PSBs’ gross non-performing assets (NPAs) could peak in the current fiscal; elevated levels of provisioning on these NPAs will continue to negatively affect the banks during fiscal 2018 and 2019, it added. The benchmark bond yield had closed at an 18-month high of 7.396% last week after the government announced on Wednesday it would borrow an additional Rs 50,000 crore through dated securities this fiscal year. After a brief period of cooling off, the yield again closed at 7.386% on Tuesday, after the announcement of a new benchmark bond set to be auctioned on Friday. Some respite was seen over the last two days with the yield falling by almost 5 basis points due to short-covering and value buying by banks.

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