Recapitalisation Bonds Current Affairs

Government to infuse Rs 11,336 crore capital in 5 public sector banks by September-end

Union Finance Ministry is planning to infuse additional capital close to Rs 11,336 crore in 5 more public sector banks (PSBs) by September 2018-end. These five state-owned banks are Punjab National Bank (PNB), Corporation Bank, Andhra Bank, Allahabad Bank and Indian Overseas Bank (IOB).

Key Facts

This round of capital infusion will be done through issuance of recapitalisation bonds and not directly from Budget. This additional capital will help these banks to meet minimum regulatory capital adequacy ratio (CAR) and enable them to make interest payments on certain bonds on time.

Within capital infusion plan of these five PSBs, PNB is expected to get highest amount of Rs 2,816 crore. Corporation Bank is will get Rs 2,555 crore followed by Indian Overseas Bank (Rs 2157 crore), Andhra Bank (Rs 2,019 crore) and Allahabad Bank (Rs 1,790 crore).

This capital infusion by Government will be only for purpose of meeting minimum regulatory requirement and will be not growth capital which will be provided in second half of current fiscal year. The growth capital will only be given to those banks which meet performance targets and modalities set by Finance Ministry as per agreement signed with each bank.

Background

The latest round capital infusion in these 5 PSBs will be part of remaining Rs 65,000 crore out of Rs 2.11 lakh crore capital infusion announced by Union Government for two financial years. In October 2017, Union Government had announced Rs 2.11 lakh crore capital infusion programme, under which PSBs were to get Rs 1.35 lakh crore through recapitalisation bonds, and balance Rs 58,000 crore through raising of capital from market and remaining through budgetary support. The government has already infused Rs 80,000 crore out of Rs 1.35 lakh crore through recapitalisation bonds in PSBs  and balance will be done during this financial year (2018-19).

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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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