Tuesday 14 November 2017

Capital-starved public sector banks get recapitalisation push worth Rs 2,11,000 crores

Bank Recapitalisation

The cabinet push from Govt of India has given a sigh of relief for capital-starved public sector banks. India’s Minister of Finance, Arun Jaitley announced an allocation of Rs 2,11,000 crore over the period of two years for the recapitalisation of public sector banks. The decision is believed to be in favour of India’s economic interests such as creating jobs and credit creation of Small Scale businesses.

This entails mobilization of capital, with maximum allocation in the current year, to the tune of about Rs. 2,11,000 crores over the next two years, through budgetary provisions of Rs. 18,139 crores, recapitalisation bonds to the tune of Rs. 1,35,000 crore, and the balance through raising of capital by banks from the market while diluting government equity (estimated potential Rs. 58,000 crores). By recapitalising banks through a mix of bonds and cash infusions, the government hopes to avoid breaching its fiscal deficit targets.

After the fall of the economy during 2010 to 2014, Indian banks touched a record NPAs of Rs 8,00,000 crores. Businesses owned by industrialists like Sahara and Mallyas doomed, some even escaping the territory of India to avoid jail time. In addition, Indian banks need to raise capital through Basel III norms up to 11.5% by March 2019. Jaitley’s plan of infusing Rs 70,000 crore was seen as inadequate by banking experts.

With recapitalisation of public sector banks, the intent of the government is pretty clear, to boost MSME lending with industry-specific MUDRA Yojana schemes. There will be a strong push for enabling growth of MSMEs through enhanced access to financing and markets, and a drive to finance MSMEs in 50 clusters. While Ministries concerned will spearhead and provide momentum, banks will undertake speedy processing of loan applications in a hassle-free manner. Fintech companies will be roped in to cut down the appraisal process and generate quality loan applications. MSMEs will be handheld by extending support through:
  • Compulsory TReDS (Trade Receivables electronic Discount System) registration by major.
  • PSUs within next 90 days, for shortening the cash cycle.
  • Sector-specific Mudra financial products, such as Mudra Leather, Mudra Textiles, etc.
  • Bank-approved MSME project templates for speedier credit.
  • udyamimitra.in portal, so that banks compete for financing MSME projects.
  • For registering MSMEs on the GeM (Government electronic Marketplace) portal and e-commerce platforms.

The Rs 2.11 lakh crore is adequate to cover for Basel 3 requirements and support credit offtake after that. There is a good possibility of growth and credit demand in the future. - Rajnish Kumar, Chairman, State Bank of India.

The capital of Rs 2,11,000 crore accounts to almost 80% of recapitalisation requirements. While the government has not detailed the manner in which capital will be allocated within banks, some banks need capital more urgently than others.

Major credit rating agencies considered the bank recapitalisation move as positive. Although, continuous banking reforms are required along with the use of fintech to avoid such bad loan situations in future.

    - Chaitanya Kulkarni

Source – PIB.

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