Recapitalisation plan: RBI to determine which bank will get how much money

In October, govt announced Rs 2.1 lakh crore capital infusion into NPA-hit public sector banks over next two years

Reserve Bank Governor Urjit Patel oin Wednesday said the planned Rs 2.1 lakh crore fund infusion for state-run banks is not only a recapitalisation package but to ensure that the seeds of boom-and-bust-lending cycle is not sown in future.

In October, government had announced a Rs 2.1 lakh crore capital infusion into the NPA-hit public sector banks over the next two years. Of this, Rs 1.35 lakh crore will be through recapitalisation bonds a small portion of which will also come from capital markets, and the remainder Rs 76,000 crore will come from the budgetary support.

"This will be reform and a recap package and not just a recap package, so as to ensure that this money is used to strengthen public sector banks' balance sheets and that we don't sow the seeds of the next boom and bust cycle of lending," Patel told reporters.

The Governor also said the central bank is working closely with the financial services department to finalise the extent of funding for each bank and the amount of recap bonds to be on banks' balance sheets as government's equity contribution.

He said the recap plan will be differentiated across banks. "In particular, recpatialsiation bonds will be front-loaded for banks that have managed their balance sheets more prudently and can use injected capital to lend, besides providing for legacy asset losses."

Other banks will receive the government contribution based on their resolve and progress towards reform in a significant and time-bound manner such as becoming slim by adopting simpler, better-focused business strategies and also possibly non-core asset sales, Patel concluded.