The government on Wednesday announced a reforms roadmap for public sector banks and details of how Rs 80,000 crore of funds raised through recapitalisation bonds will be allocated to 20 PSBs by March-end. Eleven weak banks are to be given a total of Rs 52,311 crore to maintain their minimum capital requirement even as nine strong banks will get Rs 35,828 crore.
The eleven weak banks are currently under the RBI’s Prompt Corrective Action (PCA), which kicks in when banks breach regulatory norms on issues such as minimum capital, amount of non-performing assets and return on assets. The central bank enforces these guidelines to ensure that banks do not go bust and follow prompt measures to put their house in order.
IDBI Bank, which has a Gross Non Performing Assets (NPA) ratio of 24.98 per cent, will receive the highest capital infusion of Rs 10,610 crore, followed by Bank of India getting Rs 9,232 crore and State Bank of India getting Rs 8,800 crore. The government said that higher capital for weak banks is being given to ensure that they meet “regulatory requirement” on minimum capital.
When the original plan of injecting Rs 2.11 lakh crore capital was announced last October, officials, including Chief Economic Adviser Arvind Subramanian, had indicated that the government will follow a “selective and differential approach” wherein priority would to be given to strong lenders while weak banks may have to either shrink in size or not grow from the current position.
Alongside the fund infusion, the government announced a set of measures to keep a close watch on the asset quality of the banks, including “specialised monitoring” by agencies for corporate loans of more than Rs 250 crore.
Speaking at a press conference while announcing the plan, Finance Minister Arun Jaitley said the government will only provide capital that is sufficient to meet regulatory norms for PCA banks while non-PCA banks will get growth capital. To a query on why IDBI Bank is being given the highest amount of capital when the government had earlier announced its intention to privatise, Jaitley said “the original decision stands” but the government is waiting for the “appropriate time” to restructure IDBI Bank.
“There are some decisions the government takes but there has to be an appropriate timing for that decisions… one of the objectives in supporting non-PCA banks is that these are the banks where robust lending is to take place so that they are able to support growth, lending and the economy itself. For the PCA banks, the principal object appears to be that they maintain their regulatory capital. And that is the criteria that is being followed for the IDBI. The original decision stands, it has not been reconsidered but then there is always a time in implementing the decision,” Jaitley said.
A total of around Rs 1 lakh crore will be infused in the PSBs by March-end, which comprise Rs 80,000 crore via recapitalisation bonds, Rs 8,139 crore through gross budgetary support and Rs 10,312 crore of funds raised from the market.
Banking Secretary Rajiv Kumar said the capital infusion will enable bank to support economic growth and increase credit deployment by at least Rs 5 lakh crore in the economy.
The government’s commitment to recapitalize all PSBs is credit-positive for weaker banks but corporate governance reforms fall short of addressing structural weaknesses, said Srikanth Vadlamani, Vice President, Financial Institutions Group, Moody’s Investors Service.
“A lot of capital (being given today) is not growth capital, but reconciliation capital. It’s the bare minimum level of capital the weak banks need to stay afloat,” said HDFC Bank Chief Economist Abheek Barua. Weak banks would require “larger doses of capital” but what is “relevant is the conditions that they commit to after getting the recapitalisation funds,” Barua said.
Banks have been asked to ring-fence cash flows of corporate borrowers,to ensure that their earnings are not diverted for other purposes. The government has also mandated each of the PSBs to have a stressed assets management vertical and monetise their non-core assets such as real estate to boost their capital adequacy. All banks are being given capital to ensure that they meet the regulatory requirement, Kumar said, adding that “no PSB will fail and the depositors’ money is safe.”
To ensure that banks comply with the reforms parameters, the government said that an independent agency will conduct an Annual EASE (Enhanced Access & Service Excellence) Index Survey of banks, the results of which will be made public. As per the EASE plan, the government wants to ensure that there is a banking facility within 5 km of every village in the country.
Chief Economic Adviser Subramanian had said in October that there is a possibility to shrink or narrow the scope of unviable banks and, in this view, “recapitalization must be selective and incentive based, directing it to those banks where the bank for buck in terms of new credit creation will be maximum.” RBI Governor Urjit Patel had also said that the recapitalisation plan will “allow for a calibrated approach” under which banks that have “better addressed their balance-sheet issues and are in a position to use fresh capital injection for immediate credit creation can be given priority.”
HDFC Bank’s Barua said the government’s idea may be to first bring weak banks to the minimum level of regulatory capital before going in for shrinking them.
The government will issue recapitalisation bonds of 10-15 years maturity, carrying interest rate of around 8 per cent or lower. These bonds will be non-tradable and not carry the status of an SLR (Statutory Liquidity Ratio) security, Economic Affairs Secretary Subhash Chandra Garg said. SLR is a portion of deposits that banks need to invest in government securities. “There is no fiscal impact of bond issuance to banks…These will be swap deals and cash neutral. There is not going to be a public issue,” Garg said.
Among banks currently under the PCA, UCO Bank will get Rs 6,507 crore, Central Bank of India Rs 5,158 crore, Indian Overseas Bank Rs 4,694 crore, Oriental Bank of Commerce Rs 3,571 crore, Dena Bank Rs 3,045 crore, Bank of Maharashtra Rs 3,173 crore, United Bank of India Rs 2,634 crore, Corporation Bank Rs 2,187 crore and Allahabad Bank Rs 1,500 crore.
As the National Stock Exchange on Wednesday, IDBI Bank stock ended up 5.65 per cent at Rs 65.40, State Bank of India up 3.76 per cent at Rs 330.05 and Punjab National Bank up 5.19 per cent at Rs 195.45.