Government Details Bank Recapitalisation Plan With Riders
The regulatory capital of all state-run banks will be maintained, finance ministry says.
Public sector banks are set to receive Rs 88,139 crore in form of recapitalisation from the government this financial year, according to a presentation made by the finance ministry on Wednesday. This is the first tranche of the Rs 2.11 lakh crore recapitalisation plan that the government had first announced in October 2017.
Eleven public sector banks under the prompt corrective action (PCA) framework of the Reserve Bank of India (RBI) are set to receive Rs Rs 52,311 crore in form of recapitalisation. The other state-owned banks will receive Rs 35,828 crore. Banks put under the PCA framework are those that have high bad loans and weak capital adequacy levels.
The funds will be infused through a mix of budgetary allocation worth Rs 8,139 crore and recapitalisation bonds worth Rs 80,000 crore, said Rajeev Kumar, secretary for the government’s Department of Financial Services. Apart from this, lenders will also be required to raise funds through their own fund raising efforts from the market.
Allocations for individual banks are as follows:
Towards ‘Responsible’ Lending
The regulatory capital of all state-run banks will be maintained and no state-run bank will be allowed to fail, said government officials while addressing the press conference. Banks, however, would need to reposition themselves and move towards ‘responsible’ banking, said Kumar.
In his presentation, Kumar outlined changes that the finance ministry wants state banks to undertake in their loan sanctioning procedures and in lending as part of consortiums.
- To be part of a loan consortium, banks will need to commit atleast 10 percent of the total amount.
- All loans above Rs 250 crore will invite specialised monitoring.
- If any of the covenants decided upon at the time of a loan sanction are breached, that will be considered a red flag and shared across the consortium of lenders.
- There will be a separate stressed asset vertical in each of bank for cleaner and timely recovery.
The government has also asked all banks to identify non core assets for monetisation and rationalise overseas operation. So far, banks have collectively decided to shut down 41 overseas branches, Kumar said. T
In addition, each bank has been asked to identify its core strengths and focus on those rather than becoming ‘me-too’ lenders. A re-orientation in lending towards small and medium enterprises is also being encouraged by the government. A large part of the Rs 5 lakh crore in incremental lending capacity created by the recapitalisation package should be utilised to lend to SMEs, said Kumar.
Structure Of Recap Bonds
The government had announced a plan to infuse Rs 2.11-lakh-crore in public sector banks in October. Of this, Rs 1.35 lakh would come through recapitalisation bonds, the government had said. These recapitalisation bonds would not be counted towards the Statutory Liquidity Ratio (SLR) requirements, the government clarified. SLR is the mandatory proportion of government bonds that a bank is required to hold.
Recapitalisation bonds would be long term bonds. They would be non-tradable and will carry a coupon rate based on the comparable government security plus a spread, the government spread.
Indian banks’ non-performing loans have nearly doubled to Rs 8.4 lakh crore since October 2015 when the central bank initiated an asset quality review. Public sector lenders accounted for about 87 percent of the bad loans as of Sept. 30. The surge in bad loans meant that provisioning needs of banks soared. In addition, banks also need capital to transition towards the full implementation of Basel III norms. The Indradhanush plan to infuse Rs 70,000 crore into state-owned lenders in four years through March 2019 was seen as inadequate to meet the capital requirements.
(Corrects an earlier version which said the government is infusing another Rs 80,000 crore)