PSU banks will have to revamp their lending practices, especially in advancing loans to big businesses and in consortium lending, monetize non-core assets, rationalize overseas branches, embrace technology and move to recover loans that have turned bad, said financial services secretary Rajiv Kumar.
The strategy is to provide a lifeline to banks struggling under the legacy of bad loans so that they can once again resume commercial lending—and revive the investment cycle in the economy.
Addressing a press conference, finance minister Arun Jaitley said the need for banking reforms is independent of the government’s stated objective of encouraging consolidation in the banking sector.
“We are setting up an institutional mechanism to ensure what has happened in the past is not repeated. It is the government’s responsibility to keep state-run banks in good health and ensure they follow the highest standards of corporate governance," Jaitley said.
Public sector banks will be capitalised in the current fiscal year through a mix of recapitalisation bonds (Rs80,000 crore) and direct infusion from budgetary allocations (Rs8,139 crore). In addition, banks have raised more than Rs10,000 crore so far and will raise more in the coming months from the market, taking the total recapitalisation to over Rs1 trillion this fiscal.
The recapitalisation bonds will be of a tenor of 10-15 years and will be issued once the boards of banks commit to the banking reforms. The recapitalisation bonds will not impact the fiscal deficit this year, said Subhash Chandra Garg, secretary, department of economic affairs.
However, servicing the bonds would reflect in the future liability of the union government, Garg said. It will be a cash-neutral arrangement and the bonds will be priced at the average three-month yield of the corresponding government security plus spread.
IDBI Bank Ltd and Bank of India, which have been placed under prompt corrective action (PCA) by Reserve Bank of India, will receive the highest capital infusion from the government at Rs10,610 crore and Rs9,232 crore, respectively.
State Bank of India and Punjab National Bank, which are not under the PCA framework, will get Rs8,800 crore and Rs5,473 crore, respectively, as the government looks to support their growth.
PCA framework acts as an early warning exercise and facilitates corrective measures by banks to restore their financial health.
Unveiling the action point for banking reforms, the government said banks should have a minimum of 10% exposure in big consortium loans to ensure a greater say; at present, small banks have very little exposure and, consequently, little or no influence.
Banks have also been asked to tie up with specialized monitoring agencies for credit exposure above Rs250 crore. Proper due diligence has also been suggested while sanctioning loans. They have also been asked to scrutinize group balance sheets and ring-fence cash flows.
Banks have been asked to create a separate stressed asset management vertical to focus on recovery of loans. The banking industry is estimated to have more than Rs10 trillion of stressed loans.
Improving customer experience and easy loans for micro, small and medium enterprises (MSMEs) are also among the requirements.
Banks said the capital will help in funding growth and meeting regulatory requirements and has been allocated based on the provisioning requirement for bad loans and the board-approved growth policy that has been shared with the government.
“This capital will help us grow our loan book mainly in retail, agriculture and MSME sector, and meet regulatory capital requirements. Some amount will also go as provisioning for ageing of NPAs (non-performing assets). But that will be offset by the resolution we are expecting in the NCLT (National Company Law Tribunal) cases," said R. Subramaniakumar, MD & CEO at Indian Overseas Bank.
List of PSU banks and their capital infusion
IDBI Bank Ltd: Rs10,610 crore
State Bank of India: Rs8,800 crore
Bank of India: Rs9,232 crore
UCO Bank: Rs6,507 crore
Punjab National Bank: Rs5,473 crore
Bank of Baroda: Rs5,375 crore
Central Bank of India: Rs5,158 crore
Canara Bank: Rs4,865 crore
Indian Overseas Bank: Rs4,694 crore
Union Bank of India: Rs4,524 crore
Oriental Bank of Commerce: Rs3,571 crore
Dena Bank: Rs3,045 crore
Bank of Maharashtra: Rs3,173 crore
United Bank of India: Rs2,634 crore
Corporation Bank: Rs2,187 crore
Syndicate Bank: Rs2,839 crore
Andhra Bank: Rs1,890 crore
Allahabad Bank: Rs1,500 crore
Punjab and Sind Bank: Rs785 crore