Bank recapitalisation to come with banking reforms: Urjit Patel

RBI governor Urjit Patel says the 'reform-and-recap package' will ensure recapitalisation funds are not used by banks to sow the seeds of the next 'boom and bust cycle of lending

Alekh Archana
Updated7 Dec 2017
RBI is working with the government to finalise the bank recapitalisation plan, which Urjit Patel termed as the ‘reform-and-recap package’. Photo: Abhijit Bhatlekar/ Mint
RBI is working with the government to finalise the bank recapitalisation plan, which Urjit Patel termed as the ‘reform-and-recap package’. Photo: Abhijit Bhatlekar/ Mint

Mumbai: Reserve Bank of India (RBI) governor Urjit Patel said on Wednesday that the recapitalisation package for public sector banks will not only be linked to their capital requirements, but also on their reforms initiatives to ensure the funds are not used to sow the seeds of next “boom and bust cycle of lending”.

The central bank is working with the government to finalise the recapitalisation plan, which Patel termed as the “reform-and-recap package”.

The Department of Financial Services (DFS), a unit of the finance ministry, will soon release the details of the package, he added.

In October, finance minister Arun Jaitley had announced an unprecedented Rs2.11 trillion PSU bank recapitalisation plan to strengthen public sector banks. The plan includes recapitalisation bonds of Rs1.35 trillion.

Patel said the RBI is working with the government on the extent of funding to be raised by state-owned banks, and the amount of recapitalisation bonds to be placed on the banks’ balance sheets as the government’s equity contribution.

“recapitalisation bonds will be front-loaded for banks that have managed their balance sheet’s strength more prudently, and can use injected capital to lend besides providing for legacy asset losses,” Patel said in press briefing post the monetary policy meeting.

For other banks, the capital allocation will be based on their resolve and progress towards reform in a significant and time-bound manner. These include becoming “slim and trim” through simpler and better focussed business strategies, and also possibly the sale of non-core assets, Patel said.

According to analysts, the government will assign larger portion of the recapitalisation package to the stronger banks to push up the credit growth.

“Even as the government has shown its intent to help out banks with strong fundamentals, it is unlikely that it will leave out the weaker banks from the recapitalisation package completely. It is likely the government will assign larger portion of the recapitalisation package to the stronger banks, in order to drive up credit growth which is yet to show a sustainable improvement,” said Karthik Srinivasan, group head of financial sector ratings at Icra Ltd.

Public sector banks need capital to not only meet regulatory capital requirements under the Basel III norms but also for resolving stressed assets, which entails them to set aside funds in the form of provisions, and improve credit growth, according to analysts.

Currently, stressed loans in the banking system have risen over Rs10 trillion, while for October, the year-on year non-food credit growth was 6.6% as against 6.1% in September.

On 29 November, Press Trust of India, quoting officials in the know, had reported that the finance ministry is putting final touches to the recapitalisation bonds package and the DFS, in consultation with the RBI, has submitted proposals to the Department of Economic Affairs, which is working on the final structure.

Malvika Joshi contributed to this story.

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