Reserve Bank Governor Urjit Patel on Wednesday said the Rs 2,11,000 crore bank recapitalisation plan will be a “reform and recapitalisation” package and not just another recapitalisation package. According to Patel, this is to ensure that the money is utilised to strengthen public sector bank balance sheet and “not to sow the seeds for the next boom and bust cycle” of lending.
Unveiling the 5th monetary policy review, Patel said the government’s bank recapitalisation will favour public sector banks which have managed their balance sheets more prudently. The recapitalisation bonds will be front-loaded for banks which are capable of using the additional capital to lend better, besides providing for bad loans on their books, Patel said. The other banks will receive government contribution based on their resolve and progress towards reform in a significant and time bound manner, such as becoming slim and trim by adoption of better and focussed business strategies as also possibly, non-core asset sales, he said.
In October this year, the government had announced a Rs 2,11,000 crore bank recapitalisation plan to help public sector banks provision against a large stock of bad loans, while maintaining capital at required regulatory levels. These funds are likely to be injected through a combination of government cash infusion, recapitalisation bonds and dilution of government stake through capital market offerings. The RBI is talking to the government on the modalities of the infusion and market fundraising by PSU banks.
Meanwhile, when asked about banks admitting to under-reporting their NPAs after a regulatory diktat, the RBI clarified it has not changed any rules and attributed the ‘divergences’ to the wrong application of the rules by the banks. “We’ve assessed banks’ classification based on the rules they are today and we’ve found that in some cases, they have not applied those rules correctly,” RBI deputy governor NS Vishwanathan said.
“I want to make it very clear that there is no change in the goalposts. The rules are as they are,” he said. The divergences used to happen earlier as well based on inspection of banks’ books by the central bank, but what has changed the narrative now is the mandatory disclosure of the divergences. “What has changed is the transparency we’ve brought in the form of disclosures in the divergences when they are more than a certain percentage,” he said.
Banks started reporting divergences since this June for having under-reported NPAs in FY16. This was followed by a second round of disclosures starting October of underreporting in FY17 by a few lenders. In most cases, this led to a sharp rise in NPAs and an ensuing jump in provisions against dud assets. This eroded their bottomlines, and led to a sell-off in the stock causing erosion of wealth for investors. Private sector banks were the worst hit in this exercise. The RBI had tweaked the rules to make it compulsory for lenders to disclose under-reporting of bad assets. Before this, there was a massive book clean-up through the asset quality review (AQR) the previous year and was followed by instructions to resolve 40 largest NPAs under the Insolvency & Bankruptcy Code.