PSU banks’ recapitalisation plan will bring market discipline: Urjit Patel

Financial sector policies should support growth while maintaining financial stability, RBI governor Urjit Patel said in a statement released on the central bank’s website on Wednesday. Photo: AFP

Mumbai: The government’s package on recapitalising public sector banks will bring market discipline into such capital infusion programmes as compared to the previous ones, said Reserve Bank of India (RBI) governor Urjit Patel, adding that well capitalised banking system is essential for stable economic growth.

Financial sector policies should support growth while maintaining financial stability, Patel said in a statement released on the RBI’s website on Wednesday.

On Tuesday evening, the government announced Rs2.11 trillion for PSU banks’ recapitalisation to revive investments as well as growth. Out of the total commitment, Rs1.35 trillion will come from the sale of so-called recapitalisation bonds. The remaining Rs76,000 crore will be through budgetary allocation and fundraising from the markets.

According to Patel, through recapitalisation bonds, capital injection in state-owned banks will be front-loaded, staggering the resultant fiscal impact over a period of time. These bonds will be liquidity neutral except for the interest expense, he said.

This will also involve participation of private shareholders of public sector banks because parts of the capital needs will have to be met by market funding. “Last but not the least, it will allow for a calibrated approach whereby banks that have better addressed their balance-sheet issues and are in a position to use fresh capital injection for immediate credit creation can be given priority while others shape up to be in a similar position,” he said.

Welcoming the government’s decision, Patel said that for the first time in a decade, there is a comprehensive and coherent policy, rather than piecemeal strategy, to tackle the issues of the banking system.

The recapitalisation plan comes at a time when the banking sector is plagued with issues of rising stressed assets and lower credit offtake.