India's Union Minister for Finance and Corporate Affairs, Arun Jaitley
Image: Lucas Jackson / Reuters
In a move seen to provide a major fillip to the health of ailing public sector banks, Finance Minister Arun Jaitley on Tuesday announced a package of measures. The government said that it will provide for bank recapitalisation of ₹2.11 lakh crore.
This will be spread over the next two fiscal years, Jaitley said, at a press conference in New Delhi.
Public sector banks have, over the past 2-3 years, been amongst the hardest hit by stressed assets and bad loans. Earlier this month, a report from ratings’ agency Crisil had said that banks will need to keep aside ₹3.3 lakh crore as provisioning for large non-performing assets (NPA) accounts, in this financial year.
Out of the total ₹2.11 lakh crore government measure, ₹1.55 lakh crore would be raised through recapitalisation bonds. Another ₹76,000 crore would be available from budgetary support and raised through market borrowings. Jaitley said this move will be accompanied by further banking reforms which would be announced in the coming weeks.
Bankers, analysts and economists all welcomed the move, adding that the relief package will also be able to help banks deal with the issue of raising capital to meet Basel III global banking requirements, even while dealing with cleaning up their own balance sheets and ensuring higher provisioning for future bad loans.
State Bank of India’s newly appointed chairman Rajnish Kumar said in a statement: "This milestone announcement in one go is a bold and courageous move, and was indeed the need of the hour. It will generate balance in overall demand and supply by bringing more investments in sectors like infrastructure.” Kumar also said these funds will help in efficiently managing risk- and credit capital-related requirements of the banks.
The gross NPA ratio for the merged SBI entity in Q1FY18 rose to 9.97 percent of gross advances in the April to June quarter, compared to 6.90 percent for the solo entity on March 31, 2017. Other public sector banks, such as Bank of India and Punjab National Bank (PNB) have this year continued to be plagued by bad loans, but its overall levels have fallen from a year earlier.
Jaitley’s announcements on Tuesday come at a time when the Narendra Modi-led government has been facing flak for failing to revive economic growth and jobs for the masses.
The pace of growth of the Indian economy has slowed, with GDP growth for the April-June 2017 quarter down to 5.7 percent from 6.1 percent in the previous quarter. In fact, growth has continued to slow for the past six successive quarters. On October 2, Fitch Ratings lowered its growth forecast for India to 6.9 percent for the current fiscal, compared with its earlier forecast of 7.4 percent. India grew by 7.1 percent in the twelve months to March 2017.
Commenting on the latest government’s move, Karthik Srinivasan, group head (financial sector), ICRA says, “The bank recapitalisation plan is significantly positive for the public sector banks….as it will address the issues of growth capital and capital required to absorb losses arising out of elevated provisioning for NPAs.”
Srinivasan says the recapitalisation bonds are likely to be subscribed by the banks, whereby their investments, net worth and hence capitalisation will increase to the extent of recapitalisation bonds received by them.
Crisil’s senior director Krishnan Sitaraman also praised Jaitley’s announcement. “Crisil’s assessment of capital requirement for public sector banks to meet Basel III requirements is in the range of ₹ 1.4-1.7 lakh crore which will be met by the government’s relief package.”