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NEW DELHI: The government on Tuesday announced an unprecedented mega Rs 2,11,000 crore plan for recapitalisation of the PSU (public sector undertaking) banks in a bid to push growth and and create jobs. The Cabinet that met earlier in the day cleared the package. The Rs 2.11 lakh crore package will be spread over two years, Finance Minister Arun Jaitley said.
While Rs 1,35,00 crore will be in the form of front-loaded recapitalisation bonds, the remaining Rs 76,000 crore will be in the form of budgetary support.
While saying more banking reforms will be announced in the days to come, Jaitley was critical of banks being indiscriminate in their lending in the past and brushing the real NPA (non-performing assets) issue under the carpet for a long time.
“We believed that PSU banks at one stage did indiscriminate lending. From the lending that happened between 2008-2014, there is a big chunk which is now NPA. The NPAs were kept below the carpet,” Jaitley said.
After an asset quality review by the government, the “real situation” of the banks was revealed. The banking sector has been neck-deep with with asset quality worries. As per the latest data available, 39 listed banks have NPAs running up to a whopping Rs 8.35 lakh crore.
The Finance Minister said the the capital infusion will help improve the lending capacity of banks. The MSME ( Micro, small and medium enterprises) sector will be a priority as far as lending is concerned in order to create jobs, he pointed out.
Earlier in the day, banks stocks rose on expectations that the government is set to announce capital infusion into the ailing PSU banks. The Nifty PSU Bank index closed 3.79 per cent up at 2,984.15. Public sector lenders like Punjab National Bank, Andhra Bank, Syndicate Bank, and Oriental Bank gained between 4 and 8 per cent.
While banks remain the main source of funding for India Inc, the stubborn bad debt problem has eaten into bank profits and choked off new lending, especially to smaller firms, at a time when an economy that depends on them is stalling.
Twenty one state-run banks account for more than two-thirds of India’s banking assets. But they also account for a bulk of the record 9.5 lakh crore bad loans.
In addition to repairing their balance sheets, the banks also need crores of rupees in new capital to meet global Basel III banking rules, due to fully kick in by March 2019.
Fitch Ratings estimates Indian banks will need $65 billion of additional capital by March 2019 to meet Basel III global banking rules. Moody’s expects the top 11 state lenders alone will need nearly $15 billion. The government has just $3 billion left in its budget for bank recapitalisation.