Govt to Recapitalise Selected Public Sector Banks with Rs 10,000 Cr

The government is likely to recapitalize some state-run banks in urgent need by up to Rs 10,000 crore within a few days to help them meet regulatory capital requirements, official sources said.

According to the Finance Ministry sources here, these banks, which include the Punjab National Bank (PNB), Corporation Bank and the Central Bank of India, are under pressure to make interest payment to bond holders of their Additional Tier 1 bonds.

The high accumulated non performing assets (NPAs), or bad loans, of banks and the consequent provisioning for these, has hugely dented bank profits, while the government has decided to recapitalise four-five banks which are facing "acute shortage and risk breaching the regulatory capital requirement", the officials said.

The fresh round of capital infusion of between Rs 8,000 and Rs 10,000 crore may take place within this week, or latest by the next, in these public sector banks (PSBs).

Last October, the Union Cabinet approved a Rs 2.11 lakh crore recapitalisation plan for PSBs.

In January this year, the government notified the recapitalisation bonds to allocate Rs 80,000 crore to 20 of these state-run banks. The bonds, split into six instalments, bear interest rates between 7.35 per cent and 7.68 per cent and will mature between 2028 and 2033.

The State Bank of India (SBI) will receive the biggest share of capital from the recapitalisation bonds, estimated at Rs 8,800 crore, followed by the IDBI Bank at Rs 7,881 crore and the Bank of Baroda at 6,975 crore.

As per the plan, PSBs are to get Rs 1.35 lakh crore through recapitalisation bonds, and the balance Rs 58,000 crore through raising of capital from the market.

The NPAs in the Indian banking system have reached a staggering level of Rs 9 lakh crore, while the bad loans of only the state-run banks add up to nearly Rs 8 lakh crore.

The government has embarked on a two-pronged strategy on bad loans.

On the one hand, it has brought in the Insolvency and Bankruptcy Code (IBC) which provides for a six-month time-bound insolvency resolution process, and on the other, it has adopted the recapitalisation plan to support the PSBs.

Commenting on the development, Acuité Ratings & Research President-Ratings Suman Chowdhury described the proposed fund infusion in PSBs as a significant affirmative action which will assure the bank bond investors of continuing government support.

"It reinforces our belief that the government would continue to support the PSBs particularly those under PCA (prompt corrective action) of the RBI and would not allow regulatory capital breaches which might lead to defaults in hybrid and perpetual instruments," Chowdhury said in a statement.