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Govt will inject 2.1L cr to strengthen public sector banks, boost lending

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NEW DELHI: The government on Tuesday announced a fresh package to breathe life into ailing public sector banks through a Rs 2.11 lakh crore infusion that will provide them with much-needed share capital for lending and revive investment, crucial for job creation in the economy. Along with this, the government also unveiled a mega Rs 6.9 lakh road building programme aimed at boosting growth and creating jobs.

Describing it as a “bold and unprecedented” decision to strengthen public sector banks, finance minister Arun Jaitley told reporters that the injection, spread over two years, will be followed by a series of reform initiatives for the sector over the next few months. Along with the equity infusion, the government also announced steps to provide funding to micro, small and medium enterprises which was identified as a thrust area for bank lending.

The latest lifeline comes two years after Indradhanush, which was billed as a major revamp effort but was not sufficient to deal with the massive pile-up of bad loans that has hobbled state-run banks and hurt their ability to lend to help accelerate growth. During the current financial year and next year, the government will return to the use of recapitalisation bonds to the tune of Rs 1.35 lakh crore in addition to providing budgetary support of Rs 18,000 crore, an idea that was used in the 1990s to help ailing banks. The remaining Rs 58,000 crore will be raised by banks through a fresh issue of shares while ensuring that government holding stays above 52%.

The fund infusion into various banks will be based on twin parameters of “performance and potential” where the size of the bank, its ethos and prudence in lending will be factored in, financial services secretary Rajiv Kumar said.

Government-owned banks have been hit hard by non-performing assets in the corporate sector, which Jaitley blamed on the lending rush seen between 2008 and 2014. “A large part of the indiscriminate lending of the past has turned into NPAs… And, the stressed assets or NPAs were kept below the carpet,” the minister said, adding that a large part of the clean-up had been completed.

He said details of the recapitalisation bond would be worked out with either the government or some designated agencies issuing bonds to raise funds, which will then be pumped as equity into public sector banks. Direct borrowing by the government comes with the risk of the Centre breaching the fiscal consolidation plan. An alternative to this will be to get an agency such as Life Insurance Corporation to issue bonds. The government also has the option to borrow the funds directly and not treat it as a normal borrowing that is added to the fiscal deficit.

Chief economic adviser Arvind Subramanian said the IMF allowed such borrowings to be treated “below the line” although the government showed it “above the line” in its annual financial statements. Other officials, however, indicated that the government may opt to show it “below the line”, just as the UPA had done with bonds issued to oil companies to cover their losses.

Bankers welcomed the package. “It will generate balance in overall demand and supply by bringing more investments in sectors like infrastructure. These funds will also help in efficiently managing risk and credit capital related requirements of the banks,” SBI chairman Rajnish Kumar said.

Describing the package as “adequate”, ratings agency Crisil said state-run banks needed Rs 1.4-1.7 lakh crore additional capital to meet Basel III requirements by March 2019. “The government’s action sends a strong signal of support to PSBs and reinforces Crisil’s belief that such backing will continue – an aspect that is factored into its ratings,” the agency said.

The news of a possible package for public sector banks had fired their stocks on Tuesday with Syndicate Bank (7.1%), Andhra Bank (7%), PNB (5.5%) and IDBI Bank (4.8%) being the top gainers on the Bombay Stock Exchange whose benchmark Sensex closed 0.3% higher.

Updated: October 25, 2017 — 4:13 am

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