Recapitalisation plan: Govt, RBI drawing up list of new banking reforms

Rs 2.11-lakh-cr recapitalisation plan includes Rs 1.35 lakh cr as bonds, Rs 58,000 cr of fresh capital and Rs 18,000 cr in govt outlay

The finance ministry and the Reserve Bank of India (RBI) are drawing up a list of reform measures to accompany the recent Rs 2.11-lakh-crore bank recapitalisation plan. 

These are being prepared in consultation with banks and might be classified into short-, medium- and long-term measures.

Officials are tight-lipped about what these reforms might entail as preparations are still on. However, there are indications that some of the measures announced in Indradhanush — a seven-point plan to revamp state-owned banks but not completed — might be taken up again.

“If there are some areas which have already been identified and on which action has not been taken, these will be included in the new effort,” outgoing Finance Secretary Ashok Lavasa told Business Standard. “It has been made amply clear that injection of capital, by itself, is not enough. It has to be accompanied by several other measures, internal and external, to the banks. I think all these measures have to come in for a healthy turnaround package.” 

How these measures would be carried out, whether alongside recapitalisation or after it, is being decided by the government in consultation with the RBI and the banks, he said. “It is up to the department of financial services to sit with the banks and the RBI and identify what are the measures to be taken in the immediate short term and what are the measures that the banks should initiate for medium and longer terms.”

The Narendra Modi government had announced Indradhanush in 2015 to recapitalise the lenders based on certain performance parameters. A Banks Board Bureau was set up, large-scale management changes introduced in public sector banks and steps announced to clean up banks’ books, including the setting up of joint lenders’ forums and more debt recovery tribunals. While a number of these steps have been taken, many have floundered. Experts and banking sector insiders have been doubtful about the effectiveness of these steps.

Government sources said restructuring of banks, including through mergers and reduction of government’s stakes, were pending reforms.

This would happen after the recap as the new bonds would lead to a temporary increase in the Centre’s stake in these banks, they said. Additionally, banks might be asked to write off some of the smaller non-performing loan accounts to clean up their books further. This would be apart from the cases being referred to the National Companies Law Tribunal under the Insolvency and Bankruptcy Code.

The Rs 2.11-lakh-crore recapitalisation plan includes Rs 1.35 lakh crore as bonds, Rs 58,000 crore of fresh capital from the markets and Rs 18,000 crore in government outlay. Finance Minister Arun Jaitley had while announcing the recap measures said these would be accompanied by more banking reforms.