PSBs Recapitalisation Plan

Why in news?

• The government recently announced the details of the earlier said Rs. 2.1 lakh crore recapitalisation plan for public sector banks.
• Click here to know more on the plan.

What are the provisions?

• Package - The recapitalisation package will be spread across current financial year 2017-18 and the next year 2018-19.
• The government will infuse around Rs 88,000 crore into 20 public sector banks.
• These banks account for more than 80% of the bad loans.
• Themes - The plan includes a reforms package across six themes.
• They are:

1. customer responsiveness
2. responsible banking
3. credit offtake
4. PSBs as Udyami Mitra (friends of entrepreneurs)
5. deepening financial inclusion and digitalisation
6. developing personnel for brand PSB

• The whole-time directors of the PSBs would be assigned theme-wise reforms to oversee.
• Their performance on the themes would be evaluated by the boards of the banks.
• Differential approach - The recapitalisation package would follow a differentiated approach for banks.
• The capital infusion for the PSBs would be dependent on banks' performance.
• Accordingly, the government will give more money to the weakest ones.
• These are the 11 lenders under the Reserve Bank of India’s Prompt Corrective Action (PCA).
• In financial year 2017-18, PCA banks would get around Rs. 50, 000 crore.
• The comparatively healthier non-PCA banks would get around Rs. 35,000 crore.
• Recapitalisation bonds - The capital infusion will be done partly by recapitalisation bonds and partly by budgetary support.
• The bonds are to have a maturity period of 10-15 years and would be issued in six different slots.
• They will not have a statutory liquidity ratio (SLR) requirement and would be non-tradeable.
• The government has set strict terms for issuing the recapitalisation bonds to PSBs.
• The terms include :

1. creating a stressed asset management vertical
2. tying up with agencies for specialised monitoring of loans above Rs 2.5 billion
3. strict surveillance on big loan defaulters
4. appointing a whole-time director for monitoring reforms every quarter

Will there be a fiscal impact?

• There are apprehensions that the recapitalisation bonds would affect the fiscal consolidation efforts by the government.
• The government however assured that it would not have any substantial impact on the fiscal deficit.
• This is because the recapitalisation bonds would be "cash neutral" (does not need net cash for a transaction).
• The fiscal deficit will be impacted only by the interest cost on the bonds that the government pays every year.

What are the benefits?

• The recapitalisation package will create an incremental lending capacity with the banks.
• This is expected to catalyze the revival of the capital investment cycle in the economy.
• Banks will now be sufficiently capitalised to maintain regulatory capital requirements and also to lead growth.
• Banks would have to subject themselves to reform, become more professional, and do prudent and clean lending.
• The government would bring out a report card on compliance of these measures.

Source: The Hindu, Business Standard

Quick Fact

Prompt Corrective Action (PCA)

• PCA is primarily to take appropriate corrective action on weak and troubled banks.
• The RBI has put in place some trigger points to assess, monitor and control banks.
• The trigger points are on the basis of CRAR (a metric to measure balance sheet strength), NPA and ROA (return on assets).
• Based on each trigger point, the banks have to follow a mandatory action plan.
• RBI could take discretionary action plans too apart from these.
• RBI has initiated prompt corrective action (PCA) in as many as 11 PSBs.
• It prohibits them from undertaking fresh business activities such as opening branches, recruiting talent or lending to risky companies.

Recapitalisation bonds

• The idea is to borrow from the banks themselves and boost the weaker banks’ capital, without immediate demand for direct government budgetary support.
• Banks will subscribe to these bonds as part of their investment portfolio.
• They will use the excess deposits they acquired from the recent demonetisation drive to invest in the bonds.
• The money raised by the government will then be used to infuse fresh equity into weaker banks.