MUMBAI: Banks are finally getting billions in financial help from the public purse to take haircuts. The move will likely solve the sector’s painful legacy of reckless risk-taking, which Finance Minister Arun Jaitley on Tuesday termed as ‘indiscriminate’ lending. Experts anticipate a beneficial effect on credit growth and investment revival.
Essentially, the government will raise Rs 1.35 lakh crore of the proposed Rs 2.11 lakh crore via recapitalisation bonds issued through a special purpose vehicle or a government entity. These bonds will be subscribed by banks that are flush with funds from demonetisation and low credit offtake. The raised money will be infused into respective banks as equity to improve banks’ capital profile and spur lending.
PSBs need Rs 1.3-1.4 lakh crore towards provisioning and another Rs 1.6 lakh crore to comply with Basel-III norms. According to Moody’s Investors Service, 11 of the 22 PSBs need Rs 70,000-95,000 crore, against the Rs 20,000 crore budgeted for all PSBS until March 2019. Barring a few like SBI, BoB, and PNB, the rest all are low on capital. “These funds will help in efficiently managing risk and credit capital related requirements of the banks. It will encourage private participation, thus boosting growth going forward,” said Rajnish Kumar, chairman, SBI.
While the government has mapped out the plans, they have left out one key detail: the starting point. It is also unclear how bonds will be issued without tinkering fiscal deficit target and the bank-wise allocation of capital infusion. “We assume that a fair bit of capital infusion would happen before the end of FY18, considering the NCLT proceedings that mandate banks to comply with additional provisions by March 2018. Banks need capital to absorb that. So, a fair part of Rs 1.35 lakh crore could come in the next 1-2 quarters,” Karthik Srinivasan, group head — financial sector ratings at ICRA, told Express.
He added that banks may possibly be given tighter benchmarks to prevent defaults. “We have seen capital coming in the past and no real transmission happening on the credit side, that is the risk that has always been there,” he said.
In three-and-a-half years, the government has already infused Rs 58,848 crore in PSBs under the Indradhanush plan compared to Rs 62,734 crore infused in the six years to 2014.