Finance minister Arun Jaitley says the government will stick to the ‘glide path’ for the fiscal deficit and that the impact of the bank recapitalisation bonds on the fiscal position will depend on its legal nature and the issuing agency. Photo: PTI
Finance minister Arun Jaitley says the government will stick to the ‘glide path’ for the fiscal deficit and that the impact of the bank recapitalisation bonds on the fiscal position will depend on its legal nature and the issuing agency. Photo: PTI

Govt announces Rs2.11 trillion PSU bank recapitalisation plan

Of the total bank recapitalisation outlay, Rs1.35 trillion will come from the sale of recapitalisation bonds and the rest through the Indradhanush plan and fundraising from the markets

Mumbai: The finance ministry on Tuesday announced a Rs2.11 trillion bank recapitalisation plan for state-owned lenders weighed down by bad loans, seeking to stimulate the flow of credit to spur private investment.

The bank recapitalisation would ensure genuine borrowers get adequate funding, said Rajiv Kumar, secretary in the department of financial services. The government is seeking to kickstart the private sector investment cycle to boost the Indian economy that grew 5.7% in the quarter ended June, the slowest pace in three years.

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.

The bank recapitalisation package marks a sharp increase over the current budgetary allocation. Under the Indradhanush plan, the government has allocated Rs20,000 crore towards bank recapitalisation over the current and next fiscal years.

Indian banks are sitting on a stressed asset pile of close to Rs10 trillion, crimping their ability to give fresh loans; of this, gross non-performing assets (NPAs) account for Rs7.7 trillion and the rest are restructured loans.

According to some experts, considering the government’s current fiscal position and the huge bank recapitalisation requirement, this method of capital infusion is possibly the best option because not all PSU banks are in a position to tap markets given the asset quality issue.

Such bonds were sold in 1990s to recapitalise banks, through a route which was cash-neutral. Here, the banks sold their shares, through rights issue, to the government, which in turn sold these bonds to the banks.

The government has not specified the details of issuance of recapitalisation bonds.

“Another way is to allow banks to sell these bonds, where the government will give explicit guarantee on principal and interest service. Alternatively, they can issue recap bonds, on the lines of oil bonds, where it will sell these bonds to banks, who will then down sell such securities," said a treasury official with a Mumbai-based state-owned bank.

According to Gaurav Kapur, chief economist at IndusInd Bank, whatever route the government uses to sell these bonds it will be seen as increasing the debt burden of the government.

“This is something which will be seen as cautionary by rating agencies even though there will be limited impact on the fiscal deficit since this is an off-budget item," he said.

Finance minister Arun Jaitley told reporters that the government will stick to the ‘glide path’ for the fiscal deficit and that the impact of the recapitalisation bonds on the fiscal position will depend on its legal nature and the issuing agency. The budget has set a fiscal deficit target of 3.2% of gross domestic product for this financial year.

Arvind Subramanian, chief economic adviser to the finance ministry, said that under the accounting practice of International Monetary Fund (IMF), such recapitalisation is treated below the line, which means it is not part of the fiscal deficit. “But under our own accounting practices, it is above the line and part of the deficit. The reason it is below the line is because when you recapitalise, you don’t directly add to the demand for goods and services, which is what the deficit measures. So in that sense it is not going to be inflationary, et cetera et cetera," he said.

While there will be takers for such instruments, the rate on the bonds will be depend on what route is used to sell them and whether these bonds status of statutory liquidity ratio, bonds dealers said.

Most public sector banks need capital to not only meet the regulatory minimum capital requirements but also for cleaning up their balance sheets, which would force them to set aside more money to cover bad loans.

Rajnish Kumar, chairman of State Bank of India (SBI), said that these funds will 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," he said.

Credit growth in the banking system has remained sluggish for some quarters due to lack of demand for big-ticket corporate loans. Partly, that was also result of weak capital position of the banks as it restricted their ability to lend.

Currently, banking sector’s credit growth stood at 7% year-on-year, latest data on the RBI showed.

According to industry experts, banks require much more capital than the budgetary allocation. According to an estimate by Moody’s Investors Service, 11 big state-owned banks will require additional capital of Rs70,000-95,000 crore, against the Rs20,000 crore budgeted until March 2019.

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