Government Details Bank Recapitalisation Plan With Riders

This is the first tranche of the Rs 2.11 lakh crore recapitalisation plan.

Indian two thousand and five hundred rupee banknotes.  (Photographer: Dhiraj Singh/Bloomberg)
Indian two thousand and five hundred rupee banknotes. (Photographer: Dhiraj Singh/Bloomberg)

Public sector banks are set to receive Rs 88,139 crore in form of recapitalisation from the government this financial year, according to a presentation made by the finance ministry today. This is the first tranche of the Rs 2.11 lakh crore recapitalisation plan that the government had first announced in October 2017.

Eleven public sector banks under the prompt corrective action framework of the Reserve Bank of India are set to receive Rs 52,311 crore in form of recapitalisation. The other state-owned banks will receive Rs 35,828 crore. Banks put under the PCA framework are those that have high bad loans and weak capital adequacy levels.

The funds will be infused through a mix of budgetary allocation worth Rs 8,139 crore and recapitalisation bonds worth Rs 80,000 crore, said Rajeev Kumar, secretary for the government’s Department of Financial Services. Apart from this, lenders will also be required to raise funds through their own fund raising efforts from the market.

“Government’s commitment to recapitalise all public sector banks is credit positive for the weaker public sector banks; corporate governance reforms fall short of addressing structural weaknesses,” Moody’s Investors Service said in an emailed statement.

The recapitalisation package is also expected lines, said PK Gupta, managing director at State Bank of India.

The government had already said that part of the money will be given for the purpose of growth capital. As you know, we were adequately capitalised, we didn’t need the money immediately, but the government has said that part of the money will come for growth, so that is where the allocation to SBI will be used.
PK Gupta, Managing Director, SBI

Allocations for individual banks are as follows:

Government Details Bank Recapitalisation Plan With Riders
Government Details Bank Recapitalisation Plan With Riders

Towards ‘Responsible’ Lending

The regulatory capital of all state-run banks will be maintained and no state-run bank will be allowed to fail, said government officials while addressing the press conference. Banks, however, would need to reposition themselves and move towards ‘responsive and responsible’ banking, said Kumar.

In his presentation, Kumar outlined changes that the finance ministry wants state banks to undertake in their loan sanctioning procedures and in lending as part of consortiums. They want each bank to come up with a differentiated banking strategy.

  • Not more than 25 percent corporate exposure as per bank’s strategy.
  • All loans above Rs 250 crore will invite specialised monitoring.
  • If any of the covenants decided upon at the time of a loan sanction are breached, that will be considered a red flag and shared across the consortium of lenders.
  • There will be a separate stressed asset vertical in each of bank for cleaner and timely recovery.
  • To be part of a loan consortium, banks will need to commit atleast 10 percent of the total amount.

The government has also asked all banks to identify non core assets for monetisation and rationalise overseas operation. So far, banks have collectively decided to shut down 41 overseas branches, Kumar said.

In addition, each bank has been asked to identify its core strengths and focus on those rather than becoming ‘me-too’ lenders. A re-orientation in lending towards small and medium enterprises is also being encouraged by the government. A large part of the Rs 5 lakh crore in incremental lending capacity created by the recapitalisation package should be utilised to lend to SMEs, said Kumar.

SME is a great opportunity for India. It must be properly assessed and risks should be properly taken care of. Today NBFCs are doing a great job in SME lending. So, if you are doing your homework correct, and you have the risk management system intact, you will definitely get good benefit from SME lending.
Dinabandhu Mohapatra, MD & CEO, Bank of India

Structure Of Recap Bonds

The government had announced a plan to infuse Rs 2.11-lakh-crore in public sector banks in October. Of this, Rs 1.35 lakh would come through recapitalisation bonds, the government had said. These recapitalisation bonds would not be counted towards the Statutory Liquidity Ratio requirements, the government clarified. SLR is the mandatory proportion of government bonds that a bank is required to hold.

Recapitalisation bonds would be long term bonds. They would be non-tradable and will carry a coupon rate based on the comparable government security plus a spread, the government spread.

Indian banks’ non-performing loans have nearly doubled to Rs 8.4 lakh crore since October 2015 when the central bank initiated an asset quality review. Public sector lenders accounted for about 87 percent of the bad loans as of Sept. 30. The surge in bad loans meant that provisioning needs of banks soared. In addition, banks also need capital to transition towards the full implementation of Basel III norms. The Indradhanush plan to infuse Rs 70,000 crore into state-owned lenders in four years through March 2019 was seen as inadequate to meet the capital requirements.