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Performance-based fund infusion for public sector banks unlikely

State-run banks may not get capital based on their performance and reform measures

Punjab National bank
Punjab National bank is an Indian multinational banking and financial services founded in 1894 | Photo: Shutterstock
Somesh Jha New Delhi
Last Updated : Sep 27 2018 | 9:20 AM IST
The government may ditch its plans to infuse capital into public sector banks (PSBs) based on their performance and reform measures this financial year, as it looks to pump in money to meet regulatory requirements and help grow loan books of the banks.

This comes following demands from PSBs, during the annual review meeting with Finance Minister Arun Jatiley on Tuesday, that they may require early funds from the government to help them in lending more to the industry. 

In its latest move, the government has decided to infuse Rs54.3 billion in the Punjab National Bank (PNB), which was hit by Rs143-billion fraud, through recapitalisation bonds. The Delhi-headquartered bank had demanded an additional capital of around Rs80 billion for 2018-19 earlier this year following the fraud.

After rejecting its demand earlier, the government has infused Rs82.5 billion in PNB so far. The Centre had earlier pumped in Rs28.2 billion into PNB for meeting its minimal capital requirement at the time of paying interest towards Additional Tier 1 (AT-1) bonds. 

With this, the total government infusion into PSBs has reached almost Rs191 billion this financial year. Earlier, five more banks – Central Bank, Corporation Bank, Indian Overseas Bank, Andhra Bank and Allahabad Bank — were capitalised by the government. 

Finance Minister Arun Jaitley had said during a press conference on Tuesday that bankers had demanded that the government be “more upfront in capital requirement.” State Bank of India Chairman Rajnish Kumar said that the bankers demanded the government to advance its capital infusion schedule. 

“The intention is right, but with a right intention and a sizeable capitalisation programme that has been announced, you wouldn’t want to see failure. Today, some of the banks are not meeting their capital needs. Imagine a situation where banks are unable to service their tier-1 bonds, what repercussions would that have?” said Karthik Srinivasan, senior vice-president at Icra. “The near-term pain in the system is forcing the government to infuse money into weaker banks,” he said. 

When the government had announced the contours of the Rs2.11 trillion recapitalisation programme in January, department of financial services secretary Rajiv Kumar had promised that recapitalisation in 2018-19 would be dependent on the performance and reforms of PSBs. 

“This is no easy money (that the banks will get)," Kumar had said, adding that the PSBs will have to adopt the differentiated business strategy and exit from non-core businesses and focus on their core competencies, as a part of the 30-point reforms agenda chalked out by the Centre. 


The Indian Banks’ Association has roped in Boston Consulting Group (BCG) to bring out a report card on the compliance of the reforms agenda, known as EASE — Enhanced Access and Service Excellence — to which the Centre’s recapitalisation exercise in 2018-19 was linked.  The Centre was planning to bring out the report card, based on BCG’s findings, in March, and based on the performance of banks, money was supposed to be pumped in accordingly. 

“That’s the catch. The banks suggested the government that money be available to them in advance this financial year. But the fact that PSBs expect a recovery of bad loans to the tune of Rs1.8 trillion this financial year is reassuring for us,” a senior government official said. 

In the annual review meeting on Tuesday, PSBs promised the government that it will step up recovery this financial year with an equal focus on cases outside the bankruptcy courts. 

In 2017-18, PSBs had recovered bad loans worth around Rs746 billion. The banks are supposed to transfer all cases of non-performing assets above Rs500 million in a specialised vertical for recovery. 

Banks are also aiming to monetise non-core assets worth Rs187 billion this fiscal, compared to Rs114 billion in 2017-18. The PSBs will also shut down 57 foreign branches compared to two last fiscal year.

The government had announced Rs2.11-trillion capital infusion programme in October last year. According to the plan, PSBs were to get Rs1.35 trillion through recapitalisation bonds, and the balance Rs580 billion through fund raising from the market. 

Of the Rs1.35 trillion, the government had infused about Rs710 billion through recap bonds last financial year, and balance will be done during the current financial year.

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