Govt seeks nod for ~800-bn PSB recap through bonds

Expects to issue these before end of fiscal year

The Finance Ministry sought Parliament’s approval to spend ~800 billion extra this fiscal year to recapitalise state-owned banks through bonds. Thursday’s move kick-starts the ~1.35-trillion bank recapitalisation bond programme announced by Finance Minister Arun Jaitley in October to help public sector banks come out of the spiralling non-performing asset mess.

The ~800-billion infusion would take place before March 31, officials said. “These bonds will have non-SLR (statutory liquidity ratio) status, and will be non-tradable,” an official said on condition of anonymity. The SLR is a portion of deposits that banks need to invest in government securities. The SLR status to any instrument provides a traceability option and they can be traded in the secondary market.

“The intention is to ensure that banks’ ability to support growth is not diminished. Reckless lending by state-owned banks during the tenure of the previous government has impacted the ability of the banks to support economic growth. This has, in turn, impacted private investment,” Jaitley said during a reply in Rajya Sabha later in the day.

After the Centre moved forward on its bank recap programme, the benchmark Sensex reacted positively and reversed a three-session slide. The scrip of UCO Bank soared 8.50 per cent, IDBI Bank surged 8.33 per cent, Punjab National Bank gained 5.97 per cent, Bank of India went up 3.83 per cent and Bank of Baroda jumped 3.77 per cent on BSE. Index heavyweight State Bank of India rose 1.72 per cent.

The ~800-billion expenditure has been sought by the government in the form of the Third Batch of Supplementary Demands for Grants for 2017-18. The demand is for “meeting additional expenditure towards the recap of public sector banks through issue of government securities”, a finance ministry document said. The additional expenditure would be matched by receipts of ~800 billion on issues of securities to the banks and would “not entail any cash outgo”, it added.

While fin er details are not known, the whole transaction will only be a ‘below-the-line’ book entry for calculation of the fiscal deficit and, hence, would not impact an already precarious fiscal situation this year, banking experts said. The ~1.35- trillion bank recap bonds, to be issued over this fiscal and the next, would be part of a larger ~2.11trillion bank re capital is at ion programme. Apart from there cap bonds, the Centre will cough up a total of ~180 billion this year and the next, and the rest ~580 billion would be mobil is ed from the market by the banks.

The issuance of these bonds will be front loaded. While the Centre hasn’t announced anything yet, there are a number of parameters on the basis of which there cap bonds will be distributed among the banks. It is likely that weaker banks will be inf used with further capital only to cover their provisioning requirements, while the stronger banks will be provided with capital for growth as well.

Which bank gets how much will depend on how the lenders have dealt with non-performing assets, what is the progress of have been referred under the insolvency and bankruptcy code, how effective has their provisioning been, and other issues.

As Business Standard had reported earlier, the banks may be required to clean up their books further by writing off a small portion of non-performing assets, apart from the cases being referred to the National Company Law Tribunal under the Insolvency and Bankruptcy Code. The total quantum of non performing assets in the Indian banking system increased to ~7.33 trillion as of June 2017, from ~2.75 trillion in March 2015.