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The government is discussing infusion of an additional capital in public sector banks (PSBs) and might issue recapitalisation bonds, to pump in money without disturbing the fiscal deficit reduction road map. While the annual interest on these bonds and the principal on redemption will be paid by the Central government, the funds so raised are to be used to capitalise the PSBs. The finance ministry has held discussions with the banks to assess their capital requirements, and the recapitalisation bonds are being seen as one option of providing capital, a government official said.
Government sources said that discussions are underway to raise capital support by another Rs 20,000-25,000 crore for the PSBs — over and above the Rs 10,000 crore provided in the current financial year’s Budget for their capitalisation. The extra capital is expected to be generated through sale of non-core assets of the banks and equity infusion by the government via the recapitalisation bonds. With enough liquidity in the banking system post-demonetisation, lenders are expected to buy these bonds — and the money so raised can be used to provide capital to government banks.
Even as finance minister Arun Jaitley last month said that the government is considering “additional moves” for the economy, a pick-up in credit offtake is being seen as a key element to improve economic activity. Adequate capital, especially in the wake of banks pursuing bad loan resolution plans to pare stressed assets, is essential to ensure that lenders are able to support growth. Gross domestic product growth has fallen to 5.7 per cent in the April-June quarter, the lowest in at least five quarters.
“When bank balance sheets are so weak, they cannot support healthy credit growth. Put simply, undercapitalised banks have capital only to survive, not to grow; those banks, which are barely meeting the capital requirements, will want to generate capital quickly, focusing on high interest margins at the cost of high loan volumes. The resulting weak loan supply and the low efficiency of financial intermediation have created significant headwinds for economic activity,” Reserve Bank of India deputy governor Viral Acharya said on September 7, while acknowledging the need for “substantial additional capital infusion”.
Till July 21 in the current financial year, outstanding gross bank credit fell 2.7 per cent to Rs 69.45 lakh crore, according to data from the RBI. While overall credit to industry declined 1.9 per cent during this period, the contraction at 4.1 per cent was the highest for medium-scale industries, followed by 1.9 per cent for micro and small industries.
Sources, during the discussions on capital requirements of banks, suggested the government to give (statutory liquidity ratio) ‘SLR bonds’ status to the recapitalisation bonds. The government had earlier announced the “Indradhanush” plan to revamp the PSBs — which involved capital infusion of Rs 70,000 crore over a four-year period. However, with the insolvency resolution process against large defaulters going, their capital requirements are set to rise as they will need to account for loan losses.
“The Government of India has been infusing capital on a regular basis into the PSBs, to enable them to meet regulatory capital requirements and maintain the government stake in the PSBs at a benchmark level… However, given the correctly recognised scale of NPAs (non-performing assets) in the books of public sector banks and the lower internal capital augmentation given their tepid, now almost moribund, credit growth, substantial additional capital infusion is almost surely required. This is necessary even after tapping into other avenues, including the sale of non-core assets, raising of public equity, and divestments by the government,” Acharya said.
