Finance ministry proposes Rs83,000-cr PSB recapitalisation

Finance minister Arun Jaitley on Thursday moved a proposal in Parliament for enhanced bank recapitalisation outlay from Rs65,000 crore to Rs1,06,000 crore in the current financial year, in a move to recapitalise state-owned banks to escape the NPA muddle and start lending again.

The government believes that banks need capital support to lend to productive sectors of the economy and to propel economic growth, “cementing India’s position as the fastest growing economy of the world.”

The enhanced provision of capital funds is aimed at meeting regulatory capital norms, especially of the better performing banks among those that are under the Reserve Bank of India’s Prompt Corrective Action (PCA) framework.  Providing capital will help these better-performing PCA banks to achieve 9 per cent capital to risk-weighted asset ratio (CRAR); 1.875 per cent capital conservation buffer and the 6 per cent net NPA threshold, facilitating them to come out of PCA threshold.

Interestingly, the funds needed to recapitalise these NPA- and scams-hi banks will have to come from RBI itself, which the finance ministry hopes to come in the form of an interim dividend.   

Infusion of funds will facilitate non-PCA banks that are in breach of some PCA thresholds to not be in breach while also strengthening amalgamation of banks by providing regulatory and growth capital.

Following comprehensive clean-up of the banking system under government’s 4R’s approach of Recognition, Resolution, Recapitalisation and Reforms, the envisaged recapitalisation would equip banks financially at levels higher than the global norms. 

Under the 4R’s government claims that the gross NPAs of PSBs have started declining after peaking in March 2018, registering a decline of Rs23,860 crore in the first half of the current financial year.  

Non-NPA accounts overdue by 31 to 90 days (Special Mention Accounts 1 & 2) of PSBs have declined by 61 per cent over five successive quarters from Rs 2.25 lakh crore as of June 2017 to Rs0.87 lakh crore as of September 2018, substantially paring down credit at risk. 

The government also claims that the Provision Coverage Ratio (PCR) of PSBs has risen steeply from 46.04 per cent as of March 2015 to 66.85 per cent as of September 2018, giving banks cushion to absorb losses.

Record recovery of Rs. 60,726 crore has been effected by PSBs in the first half of the current financial year, which is more than double the amount recovered over the corresponding period last year. 

PSBs have also de-risked their portfolio as reflected in the Credit Risk-weighted Assets (RWAs) to Gross Advances ratio, which has been decreased from 80.26 per cent in September 2017 to 71.20 per cent in September 2018.

India’s global rank on “getting credit” under World Bank’s Ease of Doing Business Index has improved from 44 in 2016 to 22 in 2018, manifesting enhanced access and service excellence (EASE) in banking, the finance ministry claims.

The finance ministry also noted that India’s capital norms for banks are 1 per cent higher than the norms recommended under the global Basel-III framework. Further, unlike the early intervention regime of other major economies, India’s PCA framework for weaker banks has more onerous thresholds, viz, higher capital thresholds and a Net NPA threshold that further embeds capital requirement on account of provisioning of NPAs. Today’s proposal in an expression of government’s commitment that each PSB is an article of faith, and aims at securing compliance even for the higher regulatory norms.