Huge capital for public sector banks

The massive Rs 2.11 lakh crore recapitalization for the cash starved public sector banks is likely to push up growth in the economy by kick-starting the bank credit and private investments. The pile-up of bad loans was inhibiting banks from lending due to their weak capital position.

Finance Minister Arun Jaitley announced Rs 2.11 lakh crore capital infusion for the NPA-hit public sector banks over a period of two years. Out of this, Rs 1.35 lakh crore will be through the recapitalisation bonds, while remaining Rs 76,000 crore from the budgetary support.

The capital infusion would be accompanied by series of banking reforms which would be spelt out in the next few months. The nature of the bonds and details of the bonds would be made public during the course of time, he said.

Banking sector non-performing assets (NPAs) rose from Rs 2.75 lakh crore in March 2015 to Rs 7.33 lakh crore as on June 2017, Department of Financial Services Secretary Rajiv Kumar said. Of the total, Rs 1.75 lakh crore relates to just 12 cases which have been referred to the National Company Law Tribunal (NCLT).

According to Rajiv Kumar, secretary in the department of financial services at the finance ministry, "Capital allocation to banks would ensure genuine borrowers get adequate funding. The government is seeking to kick-start the private sector investment cycle to boost an economy that grew 5.7% in the quarter ended June, the slowest pace in three years."

Rajnish Kumar, chairman of State Bank of India (SBI), said, "It will generate balance in overall demand and supply by bringing more investments in sectors like infrastructure. These funds will also help in efficiently managing risk and credit capital related requirements of the banks. The steps will also encourage private participation thus boosting growth going forward. The thrust to infrastructure will generate direct and indirect positive cascading effects for lot of related sectors and will create feel good factor for all stakeholders."

About Rs 76,000 crore of capital infusion will come from the Budget and the remaining in the form of bonds where banks will raise money from institutions. This will be a boost to the Rs 14 lakh crore of capex programme of the government over the next five years.

But the question is whether the lack of capital was inhibiting growth? With most banks investing close to 28% of their excess capital into government bonds, the additional money may also go in the same direction unless the stalled projects manage to come on stream.

Karthik Srinivasan, group head — financial sector ratings, Icra, said, "The year-on-year credit growth of the banking sector stood at 7% as on September 2017, which has been much lower than the past and has been partially driven by weak capital position of the banks and consequently their inability to lend."

Srinivasan added that 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. This is also likely to be liquidity non-disruptive and hence have minimal impact on the liquidity conditions and the market yields.