PSU banks gain after finance ministry unveils a four-year plan for capitalization

Shares of eleven public sector banks rose by 2.18% to 6.3% at 10:55 IST on BSE after the finance ministry on Friday, 31 July 2015, unveiled a long-term four-year plan for capitalization of PSU banks.

The finance ministry made announcement after trading hours on Friday, 31 July 2015.

Meanwhile, the S&P BSE Sensex was up 91.57 points or 0.33% at 28,206.13.

Among public sector banks, UCO Bank (up 2.94%), Syndicate Bank (up 3.26%), Punjab National Bank (up 3.11%), Corporation Bank (up 3.8%), Allahabad Bank (up 2.18%), Bank of Baroda (up 5.95%), State Bank of India (SBI) (up 3.55%), Union Bank of India (up 3.02%), Canara Bank (up 3.44%), Bank of India (up 3.1%) and United Bank of India (up 6.3%) edged higher.

The finance ministry said the government proposes to make available a total Rs 70000 crore out of budgetary allocations for four years for capitalization of public sector banks (PSU banks). The government will pump in Rs 25000 crore for capitalization of PSU banks during the current financial year 2015-16. It will make available Rs 25000 crore in 2016-17 and Rs 10000 crore each in 2017-18 and 2018-19 for capitalization of PSU banks.

According to the finance ministry's estimates, PSU banks will require about Rs 1.8 lakh crore of extra capital over a period of four years until 2018-19. Of this requirement, PSU banks will be able to raise Rs 1.1 lakh crore from financial markets on the back of an expected improvement in their valuation. As of now, the PSU banks are adequately capitalized and are meeting all the Basel III and RBI norms. However, the government wants to adequately capitalize all PSU banks to keep a safe buffer over and above the minimum norms of Basel III.

The Rs 25000-crore earmarked for PSU bank recapitalization this year will be allocated through three tranches. In the first tranche, the government will make available about Rs 10000 crore to those banks which require support and every single bank will be brought to the level of at least 7.5% by Financial Year 2016. In the second tranche, about Rs 10000 crore will be allocated to top six big PSU banks viz. State Bank of India, Bank of Baroda, Bank of India, Punjab National Bank, Canara Bank and IDBI Bank in order to strengthen them to play a vital role in the economy. In the third and final tranche, the remaining Rs 5000 crore will be allocated to the banks based on their performance during the three quarters in the current year judged on the basis of certain performance parameters. This will incentivize them to improve their performance in the current year, according to a statement from the finance ministry.

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