Weak banks to get lion's share of Rs 881-bn recapitalisation bonds

Govt sets strict terms for banks; to bring out report card on compliance

The Centre on Wednesday announced a reform-oriented Rs 881 billion capital infusion in 20 public sector banks (PSBs), with a major chunk flowing into the weaker banks to meet their capital adequacy requirements.

The government has set strict terms for issuing the recapitalisation bonds to PSBs. The terms include creating a stressed asset management vertical, tying up with agencies for specialised monitoring of loans above Rs 2.5 billion, strict surveillance on big loan defaulters, and appointing a whole-time director for monitoring reforms every quarter, among others.

 

“The recapitalisation enables additional credit off-take capacity of PSBs by more than Rs 5 trillion. Banks will now be sufficiently capitalised to maintain regulatory capital (requirements) and also to lead growth,” said Rajiv Kumar, secretary, Department of Financial Services. He said banks would have to subject themselves to reform, become more professional, and do prudent and clean lending. The government, he added, would bring out a report card on compliance of these measures.
 

Eleven banks facing prompt corrective action by the Reserve Bank of India will receive Rs 523 billion this financial year. The comparatively healthier banks will receive Rs 358 billion through the recapitalisation bonds. IDBI Bank, which has the highest share of non-performing assets (NPAs) among banks at around 25%, will be infused with Rs 106 billion, followed by Bank of India at Rs 92 billion. Among the healthier banks, State Bank of India (Rs 88 billion), Punjab National Bank (Rs 54.7 billion) and Bank of Baroda (Rs 53.7 billion) will receive the highest shares. Indian Bank, a smaller but profitable state-run lender, was the only bank to have not been allocated any capital in the latest round.

“The government has the prime responsibility of keeping PSBs in good health. We inherited a major problem and, therefore, we have been involved in finding a solution to that problem. Banks have to also take various steps to ensure governance is followed to the highest standard,” Finance Minister Arun Jaitley said while making the announcement, which is part of a Rs 2.11 trillion bank recapitalisation plan announced last October.

“The bonds will be of maturity of 10-15 years in six different slots. The coupon rate will be priced at three months’ average (for gilts) plus the spread. It will not be more than 8%,” Economic Affairs Secretary Subhash Garg said. The bonds will not be granted the status of statutory liquidity ratio in which a portion of bank deposits are required to invest in gilts.

“The capital infusion will help the bank meet its regulatory requirements. It will also provide headroom for credit expansion,” said R Subramaniakumar, managing director and chief executive officer, Indian Overseas Bank, which will receive Rs 46.9 billion from the government.

RP Marathe, managing director and chief executive officer of Bank of Maharashtra, said his bank had a plan to improve asset quality and he was confident of steering the bank towards profitability in the next three years. Bank of Maharashtra will receive Rs 31.7 billion under the recapitalisation plan.

“The capital infusion factors in haircuts for stressed assets under resolution. But that is not to say it provides room for extra haircuts. The decision about haircuts will be based on commercial considerations,” said Ramesh Singh, executive director, Dena Bank.

As a part of the reform measures, the size of the consortium of lenders will be reduced with a minimum 10% exposure for each participating bank. “There were earlier as many as 22 lenders in a consortium. This will essentially reduce the size of consortiums that lend to big corporate houses to seven or eight banks,” said the financial services department secretary. “It is much easier (for companies) to negotiate with fewer banks. It will be a cleaner process.”

Srikanth Vadlamani, vice-president, financial institutions group, Moody’s Investors Service, pointed out some of these changes were steps in the right direction but were not adequate to address the governance issues facing these banks.

A Prasanna, chief economist at ICICI Securities Primary Dealership, added a floating coupon rate for the bonds would ensure the cost of servicing did not cause undue burden on the government.

In October, Jaitley had announced a two-year, Rs 2.11 trillion roadmap to strengthen public sector banks reeling from bad debts. Toxic assets in the Indian banking system grew to Rs 7.33 trillion in June 2017 from Rs 2.75 trillion in March 2015. The plan includes floating Rs 1.35 trillion recapitalisation bonds and raising Rs 580 billion from the market by diluting the government's stake in these banks.