Govt to infuse Rs 2.11 lakh crore into PSBs, more banking reforms to follow: 10 facts

In its bid to revive state-owned banks struggling due to bad loans, the government on Tuesday announced a mega plan to breathe life into them and provide them with much-needed share capital for lending and revive investment.

India's banks have been plagued by the highest stressed-asset ratio in 17 years, eroding its capital buffers and hitting lending ability. The investors are reluctant to buy shares of lenders given their concerns over profitability and asset quality.

It was in recognition of this crisis that banks are faced with that Finance Minister Arun Jaitley on Tuesday announced a Rs 2.11 Lakh crore package for the recapitalisation of Public Sector Banks. This was other than the Rs 6.7 lakh crore infrastructure package it announced for building roads and highways totaling 83,000 km in five years.

Here are 10 things you need to know about the government’s mega PSB recapitalisation plan:

How the government wants to fund banks

1. The government has approved a bank recapitalisation programme of Rs 2.11 lakh crore. Rs 1.35 lakh crore of this spending will be met through recapitalisation bonds while another Rs 76,000 crore will come from budgetary support and equity issuance while ensuring that the government's holding remains over 52 per cent, the FM said, 
2. Describing it as a "bold and unprecedented" decision to strengthen public sector banks, Jaitley said that the infusion, spread over two years, will be followed by a series of reform initiatives for the sector over the next few months. He did not elaborate.
3. The fund infusion into various banks will be based on twin parameters of "performance and potential" where the size of the bank, its ethos and prudence in lending will be factored in, Financial Services Secretary Rajiv Kumar said.
4. Public sector banks have seen bad loans swell from Rs 2.78 lakh crore as of March 2015 to Rs 7.33 lakh crore in June this year, primarily because of reclassification of loan in their books, the ministry said.
5. The lifeline comes two years after Indradhanush, which was billed as a major revamp effort but was not sufficient to deal with the massive pile-up of bad loans that has hobbled state-run banks and hurt their ability to lend to help accelerate growth. Returning to the use of recapitalisation bonds to tide off ailing banks is an idea that was used in 1990s.
6. A lending rush between 2008 and 2014 is responsible for the bad loan crisis that PSBs currently find themselves in, Jaitley said. "A large part of the indiscriminate lending of the past has turned into NPAs... And, the stressed assets or NPAs were kept below the carpet," he said, adding that much of the cleanup has been completed.
7. Bankers have welcomed the package and expect it to generate balance in overall demand and supply by bringing more investments in sectors like infrastructure. “These funds will help in efficiently managing risk and credit capital related requirements of the banks," SBI chairman Rajnish Kumar said.
8. Credit rating agencies have seen the move as a positive which will bolster the risk buffers of state-controlled banks and support the financial system. "The proposed infusion is a sizable jump over what had been pledged before as India is seeking to plug a large part of the core equity gap at the state-run banks," Fitch Ratings Ltd. said. This addresses "weak core capitalization, one of the key drivers for our negative outlook on the South Asian nation's banking sector."
9. Moody's Investors Service analyst Srikanth Vadlamani said the move is a "significant credit positive" for India's state-run banks. The amount of capital pledged is enough to address the lenders' solvency challenges and recapitalise them adequately, he said.
10. Crisil described the package as "adequate", and said state-run banks needed Rs 1.4-1.7 lakh crore additional capital to meet Basel III requirements by March 2019. The government's action sends a strong signal of support to PSBs and reinforces Crisil's belief that such backing will continue - an aspect that is factored into its ratings, the agency said.

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