Govt lays down strict conditions for capital infusion in PSU banks
The conditions for bank recapitalization include active bad loan management, fundraising from markets, selling non-core assets and shutting money-losing bank branches
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Mumbai: The government’s Rs8,586 crore capital infusion in 10 weak public sector banks (PSBs) in the current fiscal year is based on their meeting strict milestones, including raising capital from other sources and curtailing employee benefits.
On 16 March, the department of financial services sent a letter to the bosses of these banks detailing the conditions to be met and also asked them to get their employees on board. Mint has reviewed a copy of this letter.
The conditions imposed by the government include: active bad loan management, arranging capital from the market, a continuing plan for selling non-core assets, shutting money-losing branches and temporarily paring employee benefits, if necessary. The Business Standard reported on Sunday that this would include curtailing industry-standard pay hikes and benefits such as leave travel allowance.
To ensure that employees and workers’ unions are committed, the government wants to formalize this framework with a tripartite memorandum of understanding (MoU).
“This MoU is to commit all participants (the government, PSB management and employees of the concerned PSBs) to the agreement for a time-bound plan beginning FY18 onwards with quantifiable and measurable milestones which can be monitored on a quarterly basis,” said the letter. Such an MoU is not unprecedented. Twenty years ago, three banks, including Indian Bank, Uco Bank and United Bank, were asked to curtail their employee benefits.
Spokespersons for the 10 banks and the department of financial services couldn’t immediately be reached for comment.
“So far the government was saying, we will not capitalize weak banks. We welcome this shift. We are not averse to signing any agreement which includes temporary changes in employee benefits. We want banks to perform well,” C.H. Venkatachalam, general secretary of the All India Bank Employees Association, said, adding that the union is, however, against dilution of government ownership.
Separately, Venkatachalam told news agency IANS that the bank unions are meeting on 24 March to discuss this issue.
“The release of capital is based on the premise that banks would significantly improve their performance with prudential financial management and going further that they will be able to meet capital needs through their own earnings,” said the letter written by the department of financial services.
In July, the government had announced that it would infuse Rs22,915 crore (out of the Rs25,000 crore earmarked for the current fiscal) in 13 state-owned banks. At that time, it had said it would release 75% of the earmarked funds immediately, while the remaining amount, linked to the banks’ performance, will be released later.
Under its so-called Indradhanush programme, the government will infuse Rs70,000 crore in state banks over four years while they will have to raise a further Rs1.1 trillion from the markets to meet their capital requirements in line with global Basel III risk norms.
PSBs are to get Rs25,000 crore in 2015-16 and 2016-17 each. Besides, Rs10,000 crore each would be infused in 2017-18 and 2018-19. In his budget speech on 1 February, finance minister Arun Jaitley announced a capital infusion of Rs10,000 crore for the next fiscal.
SBI Caps has been mandated to design a detailed bank-wise plan based on which the tripartite agreement between the government, bank’s management and employees of the bank will commit to the milestones. Banks have been asked to send in their consent by Sunday.
“Capital under Indradhanush plan is more of a bailout capital in nature. We do not see this as growth capital. During demonetization, there is a high probability that operating expense shot up and margins took a hit. It has therefore became difficult for the bank to meet the capital requirement ratios,” said Udit Kariwala, financial institutions analyst, India Ratings.