Mumbai : 16 December 2017
With the Government being cognizant of the urgent need to recapitalize Public Sector Banks (PSBs) and the recent announcement of Recapitalization scheme, the banking system is poised for a major turnaround. Commenting on the Bank Recapitalization plan announced on 24 October, Mr Chandrajit Banerjee, Director General, CII said “India’s decisive Public Sector Banks (PSBs) recapitalization plan has been met with a big thumbs-up by markets. Recapitalization will help PSBs accelerate provisioning for, and resolve, NPAs, and clean up their balance sheets. These reform measures may, over the next couple of years, nudge the credit growth to double digits which will be a very welcome change for the banking sector and the economy.”
Going forward, CII has suggested a 6 Point Agenda to the Government to further recapitalize the Public Sector Banks (PSBs). A prudent combination of any or all these recommendations will go a long way in easing the PSBs of the NPA overhang by infusing capital and creating the necessary momentum for credit growth in the economy.
First, over the next 2-3 years, the Government could consider bringing down its stake in most PSBs to 33%. It could retain a larger share in the State Bank of India in order to meet priority needs. The off-loading of stake may be in the form of preference shares instead of equity shares, to maintain the majority voting rights with the Government with nil transference to the investors. On a more immediate basis the government may consider going for public issue to dilute their stake to 52 percent with the 33 percent being a target over the next 3 years.
The Infrastructure Sector is a major source of bad assets for PSBs, resulting from a mismatch between the relatively short-term nature of bank assets and the long-term tenure of infrastructure loans. CII’s second suggestion is that Banks could consider looking at re-financing their infrastructure portfolio through Infrastructure Debt Funds thereby creating investment vehicles where institutional investors such as insurance and pension funds can invest and refinance existing debt of infrastructure companies.
The third suggestion is that since the Recapitalization Bonds of INR 1.35 lakh crores announced by the Ministry of Finance would come with a de-facto sovereign guarantee, the same amount could be raised by the PSBs from general public and institutional investors including pension funds by reissuing these bonds, resulting in a “2X” impact on total recapitalization.
As the fourth agenda point, CII has suggested that Banks could consider securitization of their good and performing loan portfolios and monetize the debt to raise funds to capitalize their books.
The Government under the budgetary support has announced an additional infusion of INR 18,139 crores. The fifth suggestion of CII is that the Government may consider further increasing the amount allocated to the Indradhanush scheme to capitalize PSBs through collected surplus.
The sixth suggestion is that the Government could look at creating a safe scaffolding by distancing itself from management of PSBs through the creation of a Bank Holding Company which could assume the entire Government stake in all PSBs. Such a holding company would be empowered to raise resources from various sources and issue bonds, and would also monitor the performance of the PSBs.
Currently, PSBs are majorly owned by Government with a minimum stake of 58% which has now been relaxed to 52%. However, many PSBs have a much higher Government equity holding at over 80%, while only 4 have brought down the share to 58% as of March 2017. New accounting standards will also be applicable for banks from April 1, 2018. This is likely to increase provisioning requirements on bad loans by as much as 30%, further adding to PSBs capital requirements, said CII in its recommendation.