Govt seeks go-ahead from Parliament for ₹80,000 crore recap
The government on Thursday sought Parliament’s nod for an additional spending of ₹80,000 crore for capitalising state-run banks through issue of government securities, as it looks to boost bank balance sheets hit by rising bad loans to ensure flow of credit to important sectors of the economy.
The government, however, did not release the details of the allocation to state-run banks.
The government had kickstarted the process of capitalising state run banks with many lenders including Central Bank of India, UCO bank and Bank of Maharashtra announcing capital infusion by the government over the past few days.
In October, the finance ministry had announced a two-year ₹2.11 lakh crore bank recapitalisation plan for state-owned lenders. Out of ₹2.11 lakh crore, ₹1.35 lakh crore was to come from the sale of so-called recapitalisation bonds and the remaining ₹76,000 crore through budgetary allocation and fund-raising from the markets.
This means that the government has front loaded the bond issuance programme leaving only ₹55,000 crore of recap bonds for the next fiscal.
In its third supplementary demand for grants, the government said this expenditure will be met through enhanced receipts, indicating that this additional expenditure may not push up the fiscal deficit.
The bonds will have non-SLR status, will be non-tradeable and will be cash neutral, said a person familiar with the development.
Market participants expect the government to follow the 1990s strategy, when these securities were first issued. The government issues recapitalisation bonds to banks in lieu of banks’ equity. This route would be cashneutral for the government but at the same time strengthen the equity capital base, which in turn would increase the leverage ratio and allow lenders to borrow more from the market.
Stronger capital will also
NEW DELHI:
improve the credit profiles of banks and enable them to tap markets at better valuations, according to analysts.
Bond market expects that these bonds will be categorised into the held-to-maturity (HTM) category of the investment book of banks, which is free from the quarter-end mark-to-market provisioning. Being non-SLR securities, the impact on bond market, especially government bonds, will be limited because it would dilute incremental demand for sovereign bonds.
Moody’s Investors Service, in a note on Thursday, said the capitalisation package will facilitate the two key policy initiatives of non-performing loan (NPL) resolution and Basel III implementation. It expects “the government will allocate the ₹1.5 lakh crore in capital across the country’s 21 public sector banks so that they will all have common equity tier 1 (CET1) ratios above the minimum Basel III requirement of 8% by the end of March 2019.”
Alka Anbarasu, a Moody’s vice-president and Senior Analyst, said the capital infusion will help state run banks build their provision coverage ratio allowing them to take haircuts on problem assets.
“Such haircuts reflect one step in the regulator’s efforts towards a thorough clean-up of balance sheets across these banks,” says Anbarasu.
Indian banks are weighed down by stressed assets of close to ₹10 lakh crore.
Of this, gross non-performing assets (NPAs) account for ₹7.7 lakh crore and the rest are restructured loans.