Bank cleanup roadmap: Capital infusion first, restructuring later

With recapitalisation bonds adding to government equity, banks will have more equity to dilute and raise more capital.

Written by Ravish Tiwari | New Delhi | Updated: October 29, 2017 6:36 am
banks in india, indian banks, bank cleanup roadmap, capital infusion, bank redevelopment, bank recapitilisation, reorganisation, recaptilisation bonds, arun jaitley, finance news, business news, india news With recapitalisation bonds adding to government equity, banks will have more equity to dilute and raise more capital. (Representational)

The contours of the Rs 2.11 lakh crore recapitalisation programme for public sector banks have begun to emerge, with the government setting a target of “three quarters”, spread across the current fiscal and the next, to get the plan off the ground. The government also appears to have decided that the much-awaited plan of reorganisation of PSU banks will have to wait until the bank recapitalisation plan takes off, according to a senior source in the government who is in the know of the deliberations at the highest levels.

“The reorganisation of banks is not likely to be pushed in the immediate backdrop of the recapitalisation announcement. It will have to be deferred till the bank recapitalisation plan takes off,” said the source. The top official also said the bank recapitalisation announcement was delayed by two to three months as the government debated which of the two tasks — reorganisation of public sector banks or recapitalisation – should be taken up first.

“Restructuring of public sector banks to consolidate them by way of mergers has been a publicly announced objective after which the strengthening efforts could have followed. However, it became clear that reorganisation is not easy and will take long. So, it was decided to go ahead with recapitalisation,” said the source. “This debate took place for two to three months within the government before it was settled in favour of recapitalisation first.”

As part of the recapitalisation plan, banks burdened by bad loans will get Rs 1.35 lakh crore through bonds, Rs 18,000 crore from the Budget and will have to raise an estimated Rs 58,000 crore from the market by diluting government equity.

Read | Banks’ real picture hidden below carpet till 2015: Arun Jaitley

With recapitalisation bonds adding to government equity, banks will have more equity to dilute and raise more capital. Banks, consequently, will be given the option to dilute government equity after availing recapitalisation bonds. The government now hopes that with markets cheering banking stocks after the recapitalisation announcement, banks will be able to raise more than the estimated Rs 58,000 crore.

“The capacity for banks to mobilise capital through this route will go up. This option is likely to place banks in a much better position to raise capital from the market by diluting government equity. This, in fact, may result in banks raising more capital than the Rs 58,000 crore that they were expected to,” said the source.

The bank recapitalisation plan comes after the government considered various other plans over the last few years to deal with the crisis in the banking sector. Policymakers had first toyed with the idea of a bad bank under the public sector. Subsequently, they also considered setting up an asset reconstruction company in the private sector.

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