The recapitalisation saga: How the government parents the PSUs

By Devanshee Dave

On January 24, Indian Finance Minister Arun Jaitley announced the most awaited recapitalisation plan for the Indian public sector banks. PSUs are criticised for the bad loans and the non-performing assets (NPAs) that they carry. The recapitalisation plan is all set to help PSUs get a sigh of relief in this chaos.

The recapitalisation plan

The government is going to infuse Rs 88,139 crore in this financial year for PSUs. This is the first tranche of the plan that the government announced in October last year. In the plan, there are two categories that will get an infusion of the mammoth amount. The first category is the PSUs that fall under the Prompt Corrective Action (PCA) framework of the Reserve bank of India, which will receive the amount of Rs 52,311 crore, and the second category is of the other state-owned banks that will get the amount of Rs 35,828 crore. It is noted that the banks that fall under PCA have higher bad loans and weak capital adequacy levels.

The capitalisation funds will be infused in two parts, the funds of Rs. 80,000 core will be allocated by issuing recapitalisation bonds and the rest of Rs. 8,139 crore will be provided by budgetary allocations. As per the recapitalisation plan, for the banks falling under PCA, IDBI bank has got the highest funds amounting Rs. 10,610 crore, followed by Bank of India and UCO Bank with Rs. 9,232 and Rs. 6,507 respectively. For the other PSUs, the highest amount of Rs. 8,800 crore is received by State Bank of India, followed by Punjab National Bank and Bank of Baroda amounting Rs. 5,473 crore and Rs. 5,375 crore, respectively.

Liabilities ahead

The fund infusion part has come with a set of restrictions and liabilities for the public sector banks. As per the Finance Secretary Rajeev Kumar, the Finance Ministry wants banks to undergo some reforms. They won’t be allowed to take more than 25 per cent of corporate exposure. All loans which would amount to more than Rs 250 crore will invite specialised monitoring. Any convents decided at the time of a loan sectioning, if breached, will be considered a red flag and will be shared across the consortium of lenders.

In addition, the banks will have to create a separate stressed asset vertical for the purpose of cleaning and be recovering the money regularly, and as a part of a loan consortium, they will have to set apart at least 10 per cent of the total sum. The government has also asked the banks to rationalize their non-core assets and overseas branches in order to create a balance which they have lost due to bad loans and NPAs.

Will they walk the talk

Indian Banks are about to meet the Basel III norms, but for that, they have to undergo drastic reforms in order to get the adequate capital. At present, the amount of the NPAs held by Indian banks is around Rs 8.4 lakh crores. It was noted that this amount is double of what the central bank measured as a part of an assertive quality review in October 2015. Out of the total NPAs, the PSUs ironically contribute for a good 87 per cent.

Even the Indradhanush plan, which was supposed to infuse Rs. 70,000 crore in state-owned banks in four years through March next year, seems insufficient to meet the requirements of capital infusion Basal III. The government is going to baby the PSUs with Rs 2.11 lakh crore, out of which in this trench, the amount of Rs 1.35 lakh crore would be in the form of recapitalisation bonds and the rest would be budgetary allocation. So, as of now all we can do is to wait and watch if these babies are going to get mature and healthy in terms of capital adequacy, bad loans and NPAs scenarios or not.


Featured Image Source: Flickr