PSBs Current Affairs

Government constitutes Alternative Mechanism Panel for PSBs consolidation

The Union Government has constituted Alternative Mechanism Panel headed by Union Finance Minister Arun Jaitley to oversee merger proposals of public sector banks (PSBs). The other members of the panel include Railway and Coal Minister Piyush Goyal and Defence Minister Nirmala Sitharaman.

Key Facts

This alternative mechanism has been set up by the government to fast-track consolidation among public sector banks to create strong lenders. The mechanism will oversee the proposals coming from boards of PSBs for consolidation.

The decision comes after government had announced Rs. 2.11 trillion bank recapitalisation plan for public sector banks weighed down by bad loans, seeking to stimulate flow of credit to spur private investment. It was also announced that recapitalisation plan will be accompanied by series of banking reforms over next few months. The constitution of an Alternative Mechanism is move in that direction.

The Union cabinet in August 2017 had decided to set up Alternative Mechanism to fast-track PSU bank consolidation. More about alternative mechanism (fig)

Purpose of PSBs consolidation

The move to create large banks through consolidating PSBs aims at meeting credit needs of growing Indian economy and building capacity in PSB space to raise resources without dependence on the state exchequer. The banking entities formed after merging PSU banks will be able to absorb shocks.

Background

The idea of bank mergers was around since 1991, when former Reserve Bank of India (RBI) governor M. Narasimham had recommended the government merge banks into three-tiered structure, with three large banks with an international presence at top. In 2014, PJ Nayak Committee also had suggested that government either merge or privatize state-owned banks.

Significance of PSBs consolidation

  • Reduce their dependence on government for capital.
  • Open up more capital generation avenues, both internally and from market, for the merged entity.
  • From a government point of view, it will increase stream of dividends which forms part of their non-tax revenue.
  • Increase the role of internal and market resources and thus reduce dependence of merged bank on government for the future capital infusion
  • It will lead to greater concentration of payment and settlement flows as there will be fewer parties in the financial sector.
  • Operational risks could increase post-merger as size of operations grows and distance between management and operational personnel is greater as the administrative systems become more complex.
  • It will help to deal better with their credit portfolio, including stressed assets. Consolidation will also prevent multiplicity of resources being spent in t same area and strengthens banks to deal with shocks,

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Government announces Bank Recapitalisation Plan to infuse Rs. 2.11 lakh crore capital in PSBs

The Union Government has announced Bank Recapitalisation Plan to infuse Rs. 2.11 lakh crore ( $32.4 billion) capital over next two years into public sector banks (PSBs) and prioritised financing support for MSMEs in 50 clusters. The capital infusion will be accompanied by a series of banking sector reforms that will be revealed in the coming months.

Key Facts

Under this plan, PSBs will get Rs 1.35 lakh crore from Recapitalisation Bonds, Rs 18,000 crore from Budgetary and remaining Rs 58,000 crore will be raised through sale of share of banks. The nature of recapitalisation bonds will be decided in coming months and these bonds will be frontloaded over next four quarters with maximum timeframe of two years.

Recapitalisation

Simply put, recapitalisation of banks mean adding capital to PSBs. As owners of PSBs, government can provide capital to them. Recapitalisation injects money without incurring any liability and is different from loan because, loan has to be repaid.

Need for Recapitalisation

Indian PSBs are saddled with high, non-performing assets (NPAs) and facing prospect of having to take haircuts on loans stuck in insolvency proceedings. NPAs of banks had more than doubled to Rs. 7.33 lakh crore in June 2017 from Rs. 2.75 lakh crore in March 2015. Due to this, PSBs were unable to give fresh loans. Even under the Indradhanush roadmap introduced in 2015, Central Government had announced to infuse Rs 70,000 crore in PSBs over four years to meet their capital requirement in line with global risk Basel-III norms to keep these banks fully solvent.

Implications of Recapitalisation

It will increase lending capacity of PSBs which will in turn boost economy and improve private sector investment especially when International Monetary Fund (IMF) projected growth to 5.7% which is lowest in three-year and create jobs. The supply of money to PSBs will enable banks lend lower interest rates. Depending on nature of recapitalisation bonds, their issuance can also impact the government’s fiscal deficit target i.e. government’s total expenditures may exceed the revenue that it generates (apart from money from borrowings). The planned capital infusion still falls short of some estimates that Indian banks need $65 billion of additional capital by March 2019 to meet Basel III global banking rules.

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