Government Recapitalizes Public Sector Banks

The Central Government has decided to infuse 2.11 lakh crore of additional capital into public sector banks over the next two years. The central government move is aimed at reviewing the growth momentum, slowed down recently.

In the recent quarters, India’s banking sector has been naturally cautious in extending fresh loans as it is hampered with bad loans. The possessions of ten lakh crores approximately, have simulated the bank credit growth slipping to a 60-year low of just 5%.

The proposed Special Purpose Vehicle help companies securitize assets, create joint ventures, isolate corporate assets or perform other financial transactions. It is foreseen for lending funds especially, debt funds of longer maturity, directly to appropriate projects to supplement loans from banks and financial institutions. The Infrastructure Development Finance Company, Power Finance Corporation, Indian Rail Finance Corporation etc., are the different organizations which are involved in raising funds for development of infrastructure sector projects. The proposed SPV, which is likely to be a government company, will improve the availability of long-term funds for infrastructure sector projects.

The implication of recapitalization is an optimistic surprise and also equates the estimates of capital requirements for the public sector banks. Government of India is the major stakeholder of Public Sector Banks and it is the government’s responsibility to infuse extra capital in order to overcome the difficulties faced by these PSBs.

Rs700-750 billion is being assumed to be accessible to the banks as development capital and a leverage ratio (loan-to-equity) for banks of eight-nine times, the available growth capital should enable banks to extend additional loans worth Rupees 5.8-6.5 trillion (7.3-8.3% of outstanding credit). The government’s bank recapitalization package is very large, at Rs2.11 trillion, or 1.3% of the gross domestic product. Naturally, it is anticipated to be raised by banks directly from the market (Rs58, 000 crore).

Even after we do not include that, the government’s injection is about Rupees 1.72 trillion (cash from the budget, recapitalization bonds, interest on the recapitalization bonds), or about 1% of gross domestic product —more than cumulatively owed over the past period.