Public Sector Banks recapitalization plan

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Public Sector Banks recapitalization plan

Indian government has come up with intent to strengthen the Public sector banks. The national financial system had been observing the alarming rate of rising NPAs of the PSBs and that had been a major concern in the economy. The total amount of   Rs. 2,11,000 Crore to Clean Up Legacy of NPAs will be released in next 2 years through budgetary provisions of Rs. 18,139 crore, recapitalisation bonds to the tune of Rs. 1,35,000 crore, and the balance through raising of capital by banks from the market while diluting government equity (estimated potential Rs. 58,000 crore).

Biggest thing to consider is that government’s actions will not be confined solely to mere recapitalization program. Owing to a fact that PSBs have a share of more than 70 % in financial system, further steps will be taken to enhance their role in financial system.MSMEs growth will also be paid special attention.GOI concluded that aggressive loaning to sectors with excessive capacity created large stressed assets as high as 12% by 2014.Asset quality reviews carried out in 2015 revealed high level of stress among the PSU banks. Gross NPA rose in PSBs from from 5.43% (Rs. 2,78,466 crore) in March 2015 to 13.69% (Rs. 7,33,137 crore) as of June 2017.

The need for such stimulus package.

 

 

Gross NPA rose in PSBs from from 5.43% (Rs. 2,78,466 crore) in March 2015 to 13.69% (Rs. 7,33,137 crore) as of June 2017.There had been consistent fears about the strain faced by banks and various rating agencies had been time again emphasising the need to make some revamp in the existing banking system. By March 2017 8 of major PSU banks had NPA s as high as 10 %.However few banks had been able to let their NPA ratio come down ,and their seemed an indication that this trend may continue in the future.

Steps taken by government in this regards over last few years.

 

Indradhanush Plan for recapitalising PSBs was announced by the Government on 14.8.2015. Government envisaged capital need of Rs. 1,80,000 crore till 2018-19. Accordingly, Government made provision   of  Rs.  70,000   crore   and projected market-raising of capital by banks to the tune of Rs. 1,10,000 crore. The launch of Indradhanush before the sharing of AQR findings by RBI with PSBs in December 2015 enabled PSBs to successfully remain Basel III compliant despite high NPA and consequential provisioning requirement identified through AQR. The present decision further builds upon Indradhanush.

Government also undertook several legislative changes to facilitate recovery and resolution of stressed assets. The Insolvency and Bankruptcy Code, 2016 was enacted as a unified framework for resolving insolvency and bankruptcy matters. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (which governs Debt Recovery Tribunals) were amended in 2016 to facilitate faster recovery. Further, the Banking Regulation Act, 1949 was amended this year to enable Government to authorize RBI to direct banks to initiate the insolvency resolution process under the Insolvency and Bankruptcy Code.

SOURCE{FORMAL STATEMENT RELEASED ON 24TH OCTOBER}

 

 

Industries’s reaction

Industry had a cautious welcome to the steps announced. Moody’s services indicated that government’s plan is a positive move to recapitalise the PSU banks. It expects that this will help in addressing the issue of weak capitalisation of PSU banks. US-based agency expects that all rated PSU banks would get enough capital to satisfy their Basel III capital requirements (https://en.wikipedia.org/wiki/Basel_III) as well as adequately address their asset quality challenges.

Industry, lawyers and economist sought a greater detail on the roadmap for the recapitalisation plan. A general consensus existed that this move will enhance public investment, which will boot private investment,but the roadmap has to be disclosed.  Government’s statements that the ‘recap bonds’ concept has to be worked out and that it was possible that these bonds may not involve cash flow. International Monetary Fund, such bonds may not be included under fiscal deficit — as it does not add to the spending.

Market’s reaction

 

 

Indian markets reacted positively to government stimulus plan. Shares in some of India’s largest banks surged by more than a quarter on the government’s program. The share price of Punjab National Bank, the second-largest state-controlled bank by assets, rose 49 while that of State Bank of India, the country’s largest lender, jumped 27 per cent. Other major state banks such as Bank of Baroda and Canara Bank jumped 28 per cent and 38 per cent respectively.

https://www.ft.com/content/1bcfd11e-b94b-11e7-8c12-5661783e5589

 

 

Other announcements

 

Government also made few other announcements about the macroeconomic stability of Indian economy, the way growth is expected to grow and also the efforts which have resulted into containing the inflation.There has been good increase in FDI. The gross FDI flows to India in 2016-17 amounted to US$ 60.2 billion, as compared to US$ 55.6 billion in 2015-16 and US$ 45.1 billion in 2014-15. As on 13th October 2017 the foreign exchange reserves exceeded US$ 400 billion.

 

Transformational reforms like GST , Insolvency and Bankruptcy Code, Housing Development, Improved ease of doing business, Institutional reforms{schemes like Ujwal DISCOM Assurance Yojana (UDAY) programme for DISCOMs; liberalization of FDI norms in various sectors; and approval of National Intellectual Property Rights Policy were mentioned} and highest ever disinvestment program were mentioned.

 

 

Government’s expectations now

 

GOI feels that such steps will have a positive impact over the next medium to long term strengthening of PSU banks. Lately SBI and its associated banks have been consolidated into one single identity which has now enabled it to be one among 50 largest banks in the world. So the government expects it to have a noticeable impact over the next coming years.

 

 

 

 

 

 

 

References

 

Press information bureau link on 24th October.

 

http://pib.nic.in/newsite/erelease.aspx

 

HARSH VARDHAN PATHAK

Msc Economics

Doon University{2011-16}

Harshvardhanpathak88@gmail.com,

coldplayharsh@gmail.com

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