The government today announced a Rs 2.11 lakh crore recapitalisation plan for public sector banks spread over two years in a bid to shore up their finances, boost private investment and revive the economy.
At a press conference held by Finance Minister Arun Jaitley, Banking Secretary Rajiv Kumar said the government will infuse Rs 1.35 lakh crore through recapitalisation bonds and Rs 76,000 crore through budgetary support and market raising.
The move comes following a 2015 announcement in which the government had sanctioned a Rs 70,000-crore capital infusion under the Indradhanush banking reform scheme, 80 percent of which has already been paid out, and which was dismissed by analysts as being too little.
The FM said the remaining Rs 18,000 crore that is remaining to be paid out under Indradhanush will be included as part of the Rs 76,000-crore infusion while banks will have to raise the rest Rs 58,000 crore through share sales.
India's public sector banks have been saddled with a gargantuan problem of bad debt, with overall gross non-performing assets to the tune of Rs 8.5 lakh crore hobbling credit growth and weighing on private sector investment.
Jaitley said that banks lent "indiscriminately" between 2008 and 2014, when gross advances increased Rs 34 lakh crore. A "large part" of this indiscriminate lending has now turned as non-performing assets (NPAs), he added.
Analysts say PSBs need capital infusion to the tune of Rs 5 lakh crore in order to fall in line with Basel III norms, which are slated to kick in in March 2019, and support growth.
At the press conference, FM Jaitley said the capital infusion will also be supplement with banking reforms, and outlined steps that the government has already taken in that direction, such as introducing the insolvency code, strengthening the SARFAESI Act and merging SBI with its subsidiaries, among others.
Secretary Kumar said banks are ready for a take-off due to strong economic fundamentals and push to public investment in infrastructure and strengthening the country's banking system will result in more jobs, growth and investments.
The FM, however, was noncommittal on whether any borrowing will impact the government's fiscal deficit target, adding that it would depend on the accounting treatment the government chooses to adopt. "The government will decide on this and announce it in due course," he said.
Arvind Subramanian, the Chief Economic Advisor to the Government of India, present at the conference said, "Recap bonds count towards debt but would depend on who is issuing it, government or banks? Under our own accounting practices, it is above the fiscal deficit line."
Former RBI Governor Usha Thorat told CNBC-TV18 that regardless of whether or not it is included in the deficit, the move wouldn't necessarily rile global rating agencies and added that the infusion would move the needle by way of repairing bank balance sheets.
But Leo Puri, MD of UTI AMC, said the government should impose conditionalities while infusing capital into banks by getting them to tighten lending standards and improve governance standards.
Source: Moneycontrol.com
