nsucurrent.com April 19, 2018

Shares of leading state-run banks fall after recapitalisation plan

26 January 2018, 02:14 | Ruby West

Rajnish Kumar chairman of the State Bank of India | Reuters


To a query on why IDBI Bank is being given the highest amount of capital when the government had earlier announced its intention to privatise, Jaitley said "the original decision stands" but the government is waiting for the "appropriate time" to restructure IDBI Bank.

"We have announced recapitalisation of PSBs in October, 2017 to the tune of Rs 2.11 lakh crore over two years". In the current round, IDBI Bank got the biggest capital injection at Rs 10,610 crore. The government has also mandated each of the PSBs to have a stressed assets management vertical and monetise their non-core assets such as real estate to boost their capital adequacy.

In a report, S&P Global said that the Centre's move will provide banks with much-needed capital to begin cleaning up their balance sheets aggressively.

Analysts said that the injections were just one step in the long process to clean up India's bad debt, and that the lenders' final capital position will also depend on how they undertake the central bank's directive to take almost 40 large corporate loan defaulters to bankruptcy proceedings, which will likely involve haircuts on their loans.

"In the first tranche, safety would supersede growth as almost 60 per cent allocation is in favour of the 11 troubled banks under the PCA". While RBI has identified the main defaulters, about 50 major corporate behemoths some of whom have escorted Prime Minister Narendra Modi to the World Economic Forum at Davos, the reluctance on the part of the central bank to name and shame the defaulters allows them the leg space to get away without punitive actions.

While the logic for bank recapitalisation is fiscally strong, and indeed the only viable option, it's the manner and layout of the allocation that should ring a few alarm bells.

While pledging 880 billion rupees ($13.86 billion) in aid to state-owned banks on Wednesday, India's Finance Ministry also handed out a set of guidelines that it wants lenders to conform to that will help clean up the financial system.

"In case of PCA banks, they should be able to reach the regulatory capital requirement".

"There is no fiscal impact of bond issuance to banks", Mr. Garg said.

The government will issue recapitalisation bonds of 6-10 years maturity. But the programme goes beyond infusion of money as the ministry informed that the recapitalisation will be "accompanied" with reforms at public sector banks.

On similar lines, Allahabad Bank fell 3.21 per cent, 2.43 per cent and United Bank of India lost 0.27 per cent. Indian Bank, Syndicate Bank and Punjab National Bank were down more than 5 per cent, whereas Andhra Bank, Canara Bank, Bank of Baroda, SBI and Union Bank were down by 3 to 4 per cent.

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