Respite to PSU banks from thin money

India Infoline News Service | Mumbai | October 25, 2017 10:36 IST

PSU banks have been struggling to meet new capital adequacy ratio and mounting NPAs. The proposal would remove these two constraints faced by PSU banks and will improve the credit growth.

State Bank of India
Yesterday, the government infused fresh life in PSU banks by announcing a large re-capitalization program of Rs 2.11 lakh crore or ~1.6% of FY17 GDP for state-owned banks. PSU banks are struggling to meet new capital adequacy ratio by FY2019 as well as mounting NPAs are adding to the woes. The proposal would remove these two constraints faced by PSU banks and will improve the credit growth. The large PSU banks like SBI, BOB and PNB are likely to be the key beneficiaries of the plan.

Below are the key points

Recapitalization Bonds – The Rs 1.35 lakh crore will come from the sale of recapitalization bonds and the rest through Indradhanush plan and fundraising from the market. Similar bonds were issued in the 1990s to recapitalize the banks through a cash neutral route. Banks issued rights to the government which in turn sold bonds to the banks. However, the government has not given details on recapitalization bonds.

Capital adequacy ratio to improve - The recapitalization plan will put some fresh breath in the PSU banks. The PSU banks have been struggling with poor capital adequacy ratio. The ambiguity on the availability of capital for PSU banks has been a constraint in resolving the NPA issues. The recapitalization plan will provide the capital to the banks to meet the capital adequacy ratio under Basel III norms.

NPA resolution to accelerate – The reported NPA of the banks stood at Rs 8 lakh crore in FY2017 and the number is continuously rising, especially in PSU Banks. The recapitalization program will allow banks to take the haircuts where needed to achieve the resolutions and thereby release the capital from bad loans from FY19.

 

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