By Disha Rawal
Over a dozen Public Sector Banks (PSBs) will be getting a capital infusion of over Rs 46,000 crores over this month in lieu of equity capital as a part of the bank recapitalisation scheme launched by the government last year. The banks include the State Bank of India, Punjab National Bank, Vijaya Bank, Allahabad Bank among others. State Bank of India, India’s largest lender will get the highest amount of Rs 8,800 crore in the form of government’s capital infusion. The banks will allot these shares on a preferential basis to the government and have already called upon the shareholders meeting this month to pass the resolution for the same.
The reason for recapitalisation
The bank recapitalisation scheme comes at the heels of the NPA crisis, which has left banks with inadequate capital to expand their lending operations and secure profits. The recapitalisation scheme was supposed to be funded by public markets and government funds. The RBI had said that reforms would be tied to these capital grants; however, there hasnt been meaningful progress along those lines. The amount of money that is being infused into PSBs is at its highest levels in all time, and more PSBs are reporting losses than ever. As evident by the PNB scam, operational risk is not being managed and there remain deep-rooted institutional flaws. The government has still decided to go ahead with the recapitalisation scheme, which can be rationalised keeping in mind the dire capital shortage that the PSBs are facing.
However, what is particularly new about this information is the preferential allotment of shares by banks to the government. This will help banks comply with Basel-3 norms about Common Equity Tier-1 requirements, which look at the banks capital against its assets. Given the time lag in the adoption of Basel 3 norms, and how they came about to shield banks against crisis situations, this move will help ensure that Basel-3 is actually implemented in India by 2019, as scheduled.
Apart from recapitalisation, several mechanisms like referring cases of NPA accounts to National Company Law Tribunal (NCLT) to recover dues as well as selling bad loans to asset reconstruction companies (ARCs), banks, FIs, and NBFCs are also being employed by banks to get rid of the bad assets.
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