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Govt clears Rs 2.11 lakh crore bank recapitalisation plan

The move is aimed at creating jobs and boosting economic growth

Dilasha Seth 

The decision to recapitalise the banks is meant to give lenders the ability to offer new credit, Finance Minister Arun Jaitley said at a press conference in New Delhi. Photo: PTI
The decision to recapitalise the banks is meant to give lenders the ability to offer new credit, Finance Minister Arun Jaitley said at a press conference in New Delhi. Photo: PTI

With economic revival being big on the agenda, the government on Tuesday unveiled a Rs 2.11-lakh crore support for (PSBs), struggling with mounting bad loans, in order to spur “genuine” infrastructure lending for upcoming mega projects.

The move is aimed at creating and boosting economic growth, which slumped to a three-year low of 5.7 per cent in the first quarter of the current financial year.

Facing a resource crunch and the target to rein in its fiscal deficit at 3.2 per cent of gross domestic product in FY18, the government will pump in Rs 1.35 lakh crore of this recapitalisation through bonds. Whether this would have a bearing on the fiscal deficit or not will depend on the contours of the bond, which are still to be decided.

The government will soon come out with “recapitalisation bonds” to support public sector banks, which account for 70 per cent of non-performing assets (NPAs) in the banking system at Rs 7.33 lakh crore.

The support, to be extended over a two-year period, is aimed at “cleaning up the legacy of NPAs”.

Another Rs 76,000 crore will come from budgetary support and banks tapping the market.


While Rs 18,000 crore will come from the government’s recapitalisation plan under Indradhanush, banks will raise the remaining Rs 58,000 crore from the market by diluting government equity.

“The strengthening of is in the larger interests of the economy,” said Finance Minister Arun Jaitley after announcing the package.

The performance and potential of will be key to capital infusion. that can lend effectively to the private sector will be given priority in fund infusion. “The government will follow a differential approach, based on their performance and potential, in injecting funds into the banks,” said Jaitley.

Jaitley said the recap would be accompanied by reforms to enable play a key role in the financial system and give a strong push to the job-creating micro, small and enterprises.


Attributing the bad loans to indiscriminate lending during the 2008-14 period of the UPA government, Jaitley said banking reforms would prevent a repetition of such practices.

“The impact on the fiscal deficit will be determined by the manner in which they are issued. It will be part of the debt of the issuing agency. The structure will be unveiled when we make the bonds public,” said Jaitley.

Financial Services Secretary Rajiv Kumar said: “The government equity can come down to 52 per cent. It is time we created stronger banks. They have to participate in the lending process to spur infrastructure investment.” 

“We have to catalyse banks to create private investment.”

The unprecedented recapitalisation and the initiatives were expected to have a noticeable impact in the near term, contributing to accelerated economic activity, employment, and the growth of the economy, the government said in its presentation.

On whether there will be traction for PSB stocks in the market, Jaitley said: “Once you strengthen the banks, certainly the traction for banking stocks will improve.”


The announcement came after the stock markets closed but the Street was expecting a bank recapitalisation plan by the government, which led to a rally in PSB stocks on Tuesday. 

The Nifty PSU bank index closed 3.79 per cent higher, with the largest lender, State Bank of India, gaining 3.56 per cent at Rs 254.50. Andhra Bank and Syndicate Bank gained over 7 per cent while most other were up 3-5 per cent. saw the SBI global depository receipts trading 14.7 per cent higher on the London Stock Exchange at 9 pm.

Under Indradhanush, a seven-pronged strategy to revive introduced in 2015, the government had announced an infusion of Rs 70,000 crore over four years to meet their capital requirements and make them compliant with Basel III global risk norms.

For the current fiscal year, the government has provided Rs 2,000 crore to as capital support and will provide the remaining Rs 8,000 crore over the next few months.

Kumar said that the issuance of the bonds would be front-loaded over the next three-four quarters so that the banks got full capital adequacy.

He added that the term and tenor of these bonds and who would issue them would be decided by the department of economic affairs. “If the government issues these bonds, it will be a part of the borrowing programme, and hence the fiscal deficit. If any government agency issues them, fiscal consolidation won’t be affected,” he said.

Gross NPAs in rose from Rs 2.78 lakh crore in 2014-15 to Rs 7.33 lakh crore as of June 2017. Provisioning worth Rs 3.79 lakh crore was made from 2014-15 to 2017-18 as against Rs 1.96 lakh crore in the previous 10 years.

Industry and bankers lauded the government’s initiative.

SBI Chairman Rajnish Kumar termed the move bold and courageous and said it was “indeed the need of the hour”.

“The funds will help in managing risk and credit capital-related requirements of the banks. The steps will encourage private participation, thus boosting growth,” he said.

Manish B Agarwal of PwC India said: “It should enable banks to start funding private infrastructure projects, particularly those on the hybrid annuity model. The focus on roads that connect economic centres will help ensure investments are focused on economic returns,” he said.

Krishnan Sitaraman, senior director, CRISIL Ratings, said it was a stimulus for

CRISIL has estimated that as a whole need Rs 1.7 lakh crore as tier I capital till March 2019 to meet Basel III norms. Banks have to maintain a capital adequacy ratio of at least 11.5 per cent by March 2019.

Confederation of Indian Industry (CII) Director General Chandrajit Banerjee said that the recapitalisation boost was likely to kick-start the credit cycle and facilitate private investments. 

Many are facing pressure on account of credit costs and have limited room to lend due to paucity of capital.

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.

Senior ministers and bureaucrats have had multiple meetings over the past few months to decide on measures to kick-start growth and create jobs, including issuance of bank recap bonds and increasing spending.

Jaitley has asked PSUs to increase their capex outlay for the year by Rs 25,000 crore, and Economic Affairs Secretary Subhash Garg had said that the government will re-assess its borrowing programme in December.

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(Inputs from Arup Roychoudhury)

First Published: Wed, October 25 2017. 02:48 IST
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