Bank Recapitalization To Help PSBs Find Their Feet Again

At a time when the stock markets are surging to new highs every other day, there was very little to cheer for the banking sector, mainly for the public-sector banks burdened with ballooning Non-performing assets (NPA), which resulted in low loan book growth. Amidst this situation, the NDA government has come up with a big bang bank recapitalization, announcing massive infusion to perk up PSU banks.

On October 24, the government announced a huge infusion of funds into state-owned banks. The recapitalisation package, amounting to Rs 2.1 lakh crore (the size of 1.3 per cent of the country’s GDP), included Rs 1.35 lakh crore via bank recapitalisation bonds to be issued to public sector banks and Rs 76,000 crore from budgetary support and market loans.

The Rs 2.11 lakh crore capital infusion into the banking sector will come over the next two years. It will come in three parts. The government itself will directly pay banks Rs 18,000 crore by buying their shares. It will also encourage banks to raise Rs 58,000 crore from the market, so there’s a 75-25 government-private infusion of new money into banks.

By injecting capital, the government is trying to partially improve the balance sheets of public sector banks, which could pave the way for them to be sold. This will also assist banks to write off some of the whopping Rs 10 lakh crore bad loans currently on their books.

As per economists, the package will help public sector banks to accelerate provisioning for stressed assets, speed up the NPA resolution process and support the clean-up of balance sheets. Moreover, it will help these banks focus on reviving credit growth. Recapitalisation will arm banks with enough capital to lend, as and when the economy rebounds.

From an economic perspective, the reach and distribution of PSU banks is very critical thus making it an important source of funding for the large section of the economy as evident by their dominant market share. Once banks are adequately capitalised, an important requirement to fund faster economic growth will be in place. In this way, this announcement sets the stage for an economic revival.

However, the economic recovery depends on number of factors. Business confidence is at an all time low and private investment too has been on a downward slide. Excluding for roads, there haven’t been many avenues of growth in government spending in infrastructure. Having said that, banks remain the heart of the financial system in India and their capitalization is critical for savings mobilization, credit offtake and revival of investment demand over the medium term. 

Going forward, the recapitalisation move coupled with other structural reforms such as bankruptcy code, Goods and Services Tax, RERA and Direct Benefit Transfer would set the base for re-acceleration of India’s growth momentum over the medium term.

Latin Manharlal Group