The Indian government on Tuesday announced an allocation of Rs 2.11 lakh crore over two years for the recapitalisation of public sector banks.
As part of the plan, the government will essentially issue bonds to banks worth Rs 1.35 lakh crore, while Rs 76,000 crore will come through budgetary support, Banking Secretary Rajiv Kumar said at a press conference in New Delhi.
Lenders will subscribe to these bonds as part of their investment portfolio. The money raised by the government will then be used to recapitalise banks. Such bonds had been used successfully in the 1990s.
Back then, in a very similar situation, the government issued recapitalisation bonds, which banks subscribed to. The funds raised thereof were used to infuse capital into banks that needed it. While recapitalisation bonds will increase the government’s liabilities and be seen as a below-the-line fiscal cost, it may prevent an additional burden on the government’s finances in the immediate term.
For the current year, the government has set a fiscal deficit target of 3.2 percent of GDP.
The recapitalisation plan reviews an earlier plan to infuse Rs 70,000 crore into state-owned lenders between fiscal 2016 and fiscal 2019. Announced in 2015, the Indradhanush program intended to infuse Rs 25,000 crore each in fiscal 2016 and 2017, followed by Rs 10,000 crore each over the next two years.
The government was keen that banks supplement this by raising capital on their own through equity issuances and sale of non-core assets. Lenders have found it tough to do this, leaving them undercapitalised.
Banks which had the lowest capital adequacy ratios at the end of the June included the Central Bank of India (9.61 percent), UCO Bank (9.69 percent), and Corporation Bank (10.62 percent).
IDBI Bank, which was at risk of skipping coupon payments on its Additional Tier-1 bonds, received capital infusion from the government in August. Among the larger banks, State Bank of India had a capital adequacy ratio of 13.31 percent, Bank of Baroda of 11.81 percent, and Punjab National Bank of 11.64 percent.
The lack of capital has prevented banks from growing and cleaning up their books by increasing provisions against bad loans. At the end of the June quarter, bad loans of listed banks had surged to over Rs 8 lakh crore. The surge in bad loans and the RBI’s directive to increase provisions for accounts undergoing insolvency has increased provisioning needs.
In addition, banks will also need capital to transition towards the full implementation of Basel 3 norms, and the new IFRS accounting mechanism. Under the Basel 3 implementation roadmap, banks need to increase total capital (including the capital conservation buffer) to 10.875 percent by March 2018, and to 11.5 percent by March 2019. The IFRS accounting norms kick-in starting April 2018, and are also expected to increase the need for capital for provisioning.
(This story was first published on BloombergQuint.)
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