Lok Sabha nod to Rs 80,000 crore public sector bank recapitalisation plan

In a breather to PSBs burdened under mounting bad loans worth over Rs 2.1 lakh crore, the Lok Sabha on Thursday gave its nod to the central government's request for additional spending of Rs 80,000 crore to boost the capital health of Public Sector Banks. The latest approval of funds will be utilised by March this year. The matter will now be heard in Rajya Sabha on Friday.

The Parliament approval is in line with the government's larger plan to strengthen the Indian economy with total financial inclusion, and bank recapitalization is a major part of the initiative. In October, Finance Minister Arun Jaitley in 2017 approved the recapitalisation of PSBs to support credit growth and job creation, entailing mobilization of capital of Rs 2.1 lakh crore in the next two years, including re-capitalisation bonds of Rs 1.35 lakh crore.

The prominent PSBs that could get capital boost include State Bank of India (gross NPA 9.8 per cent), United Bank (12.4 per cent NPA), IOB (22.7 per cent), UCO Bank (19.7 per cent), Dena Bank (17.2 per cent) among others. The funding would definitely strengthen the financial of NPA-hit public banks, whose NPA assets have increased to Rs 7.33 lakh crore as of June 2017 from Rs 2.75 lakh crore in March 2015.

Another reason for the government push to provide capital boost to PSBs is the global Basel III banking rules, which make it mandatory for governments to strengthen banks' capital requirements by increasing liquidity and decreasing bank leverage by 2019. Basel III (or the Third Basel Accord) is an international regulatory framework to remove deficiency in financial regulations.

As per Reuters, Moody's Investors Service said it expected all the 21 state banks to meet the minimum Basel III requirement of 8 per cent common equity tier 1 (CET1) ratio by March 2019, aided by the recapitalisation.

Besides recapitalisation bonds, the finance minister recently announced that banks would get about Rs 18,000 crore under the Indradhanush plan over the next two years of total Rs 70,000 crore to be infuse in the next four years. In the past three-and-a-half years, the government has pumped in Rs 51,858 crore capital in the PSBs.