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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  1. A
    Oct 29, 2017 at 2:38 pm
    There is no road map and it is not required. Let the booty announced by gobormint be shared by the political party leaders, Coporates and Bank officials. We the people of India know eactly what is going to happen, the road map , the route how the money goes and gets settle down in one of the tax heaven .
    1. K
      Kamal Pasha
      Oct 29, 2017 at 2:01 pm
      India's economy is washed out and If any body is buying bonds will regret and kill himself like farmers.
      1. I
        Oct 29, 2017 at 4:17 pm
        Indian Banks have never defaulted on bonds. Ever. So being such a pessimist
      2. S
        Oct 29, 2017 at 12:33 pm
        I don't know whether what the Government now proposes is the best alternative. But it is definitely an alternative. And I would rather trust the wisdom (or lack of it) of a Government that is trying to solve the problem... because the previous Government proved its incompetence (or corrupt intent) by facilitating the creation of these NPAs
        1. A
          Oct 29, 2017 at 11:20 am
          1. Recapitalisation of Public Sector Banks (PSBs) or merger of some of these banks is not a permanent solutions for present problems of PSbs. 2. It is an open secret that PSBs have always been controlled by Union Finance Minister (UFM) and concerned senior officials of the Finance Ministry. This was situation when P Chidambaram was UFM and this is situation even now. 3. Past experience tells that both the UFM and officials reporting to him are reluctant to let go their control on functioning of PSBs. Therefore, problem of mounting non-performing assets (NTAs) faced by PSBs has to be recognised as a failure of not only the Boards of Directors of PSBs but also of the Union Finance Ministry. The ministry never empowered Boards of PSBs with operational autonomy or had in place necessary accountability standards. Though NDA govt. has set-up Banks’ Board Bureau, issue political interference in working of PSBs has remained unanswered and hence banks’ problems will remain unattended/unsolved.
          1. R
            Oct 29, 2017 at 11:03 am
            In Summary - If an ordinary citizen does not pay tax - he will be harassed and even arrested if Big Businesses or influential business men take loans and do not pay - our Govt will bail them out with capital infusion with no plan on how to recover NPAs.
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