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Rs. 2.11 lakh crore for PSU banks to boost lending

Maximum allocation in current year, entire amount in 2 yearsGovt. equity in public sector banks to be diluted to raise fundsJaitley promises banking sector reforms will follow soonRecapitalisation of banks vital to revive growth, say economists

The Centre on Tuesday unveiled an ambitious plan to infuse Rs. 2.11 lakh crore capital over the next two years into public sector banks (PSBs)saddled with high, non-performing assets and facing the prospect of having to take haircuts on loans stuck in insolvency proceedings.

The move is vital for the slowing economy, as private investments remain elusive in the face of the “twin-balance sheet problem” afflicting corporate India and public sector banks reflected in slow bank credit growth.

Several economists opine that the recapitalisation of banks — so that they can lend more freely and help revive private investment — is critical for revitalising India’s growth momentum at a time when the global economy is recovering.

‘Front-loaded funding’

Financial Services Secretary Rajiv Kumar said on Tuesday that the Union Cabinet had approved the capital infusion plan for PSBs, adding that the funding pattern would be front-loaded.

“The Government has decided to take a massive step to capitalise PSBs in a front-loaded manner, to support credit growth and job creation,” Mr. Kumar said at a press conference. “This entails mobilisation of capital, with maximum allocation in the current year, to the tune of about Rs. 2,11,000 crore over the next two years.”

The Financial Services Secretary added that this would be funded through budgetary provisions of Rs. 18,139 crore and the sale of recapitalisation bonds worth Rs. 1.35 lakh crore. The balance would be raised by the banks themselves by diluting the government’s equity share.

“Indiscriminate lending earlier by banks led to a high level of NPAs (non performing assets),” Finance Minister Arun Jaitley said. “And these NPAs were kept under the carpet. Now they have come to light because of the Asset Quality Review conducted by the Reserve Bank of India.”

The capital infusion would also be accompanied by a series of banking sector reforms, Mr. Jaitley said, without providing any specifics, adding that the measures would be revealed in the coming months.

Cash-starved PSBs

“The government’s capitalisation package for public sector banks will provide a strong booster dose of relief for the capital starved public sector banks,” Krishnan Sitaraman, Senior Director, CRISIL Ratings said. “CRISIL’s assessment of capital requirement for public sector banks to meet Basel III requirements is in the range of Rs. 1.4-1.7 lakh crore which will be met by the government’s relief package.”

Mr. Jaitley said the nature of the recapitalisation bonds would be decided in the coming months, adding that the impact from the capital infusion on the fiscal deficit would be determined by the type of bonds and as to who the issuing authority would be.

“The nature of the bonds will be decided in due course,” Mr. Jaitley said. “They will increase the lending capacity of the banks. The effect on the fiscal deficit will depend on the nature of the bonds and also how they are dealt with. Globally, the practice is to not include bonds in the fiscal deficit calculation. In India, we do include it.”

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