Do not rush to buy PSU banks post recap plan

Do not rush to buy PSU banks post recap plan”

Jaitley said while planning recapitalisation the government had two objectives - which bank would get how much money and various steps to be taken to ensure that the PSBs follow higher standards.

Last October, the government had announced Rs 2.11 lakh crore plan to boost the capital of state-owned banks struggling with bad loans.

There was no relief for IDBI Bank, the biggest gainer of the cash infusion as its shares fell around a per cent.

Finance Minister Arun Jaitley said the government wants to build an "institutional mechanism" to ensure that problems that his government inherited do not recur. The PSBs are faced with mounting non-performing assets (NPAs) or bad loans, putting the financial sector under stress.

"This plan addresses regulatory capital requirement of all PSBs and provides a significant amount towards growth capital for increasing lending to the economy", the finance ministry said in a statement.

Going forward, each bank will adopt a board approved policy as per its core strength and monetise their non-core activity, he said, adding that many banks have identified various non-core assets and started monetising them.

"Governance reforms for state banks have been lethargic, notwithstanding the frequency of talks around changes in governance and underwriting practices at state banks", analysts at Fitch Ratings said.

Analysts said that the injections were just one step in the long process to clean up India's bad debt, and that the lenders' final capital position will also depend on how they undertake the central bank's directive to take almost 40 large corporate loan defaulters to bankruptcy proceedings, which will likely involve haircuts on their loans. Banks had until March 2017 to clean up their books to be eligible for capital infusions. "The original decision stands". "Small banks could do well in the near term, given the quantum of capital; however, returning to normalised return on equity will probably take a long time", the report warns. Also, recap bonds would not impact the fiscal deficit target as IMF's rules classify such debt as "below-the-line" financing. "In one case we are thinking of reducing the government stake to 49 per cent, IDBI Bank", he had said.

The government will issue recapitalisation bonds of 10-15 years maturity, carrying interest rate of around 8 per cent or lower.

Top lender State Bank of India will get 88 billion rupees, while second-biggest state-run lender Punjab National Bank will get 54.73 billion. Following IDBI Bank, we have Bank of India with 12.6 per ecnt of gross NPA receiving Rs 9,232 crore, UCO Bank with 19.74 per ecnt of gross NPA at Rs 6,507 crore, Central Bank of India with 17.27 per ecnt of gross NPA at Rs 5,158 crore, Indian Overseas Bank with 22.73 per cent of gross NPA getting Rs 4,694 crore.

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