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Capital Infusion in PSBs to Propel Economic Growth

Government on Monday 31 December 2018 infused ₹10882 crore Capital in four PSBs of which Bank of Maharashtra got ₹4498 crore, Central Bank of India ₹1678 crore, Syndicate Bank ₹1632 crore UCO Bank ₹3074 crore. Prior to this the government had announced infusion of 10086 crore in Bank of India; 5500 crore in Oriental Bank of Commerce and ₹2159 in United Bank of India.

Government had on Monday 20 December moved proposal in Parliament for enhanced recapitalisation outlay of Public Sector Banks (PSBs) to ₹106000 crore from ₹65000 crore in the current financial year to propel economic growth, cementing India’s position as the fastest growing economy of the world  and to equip PSBs financially at levels higher than the global norms. India’s capital norms for banks are 1% higher than the norms recommended under the global Basel-III framework. This would enable infusion of over ₹83000 crore in the coming few months in PSBs

The enhanced provision is aimed at:

  • Meeting regulatory capital norms
  • Providing capital to better-performing Prompt Corrective Action (PCA) Banks to achieve:
    • 9% Capital to Risk-weighted Asset Ratio (CRAR);
    • 875% Capital Conservation Buffer and
    • 6% Net NPA threshold, facilitating them to come out of PCA
  • Facilitating non-PCA banks that are in breach of some PCA thresholds to not be in breach
  • Strengthen amalgamating banks by providing regulatory and growth capital

The government’s aim to infuse Capital in PSBs, among other things, is to help a number of public sector banks to come out of the Reserve Bank of India’s PCA framework to free up these banks from restrictions on lending as11 PSBs have been stopped from lending freely by the RBI under the PCA framework due to their poor financial health. Those PCA banks which have shown better performance in terms of reduction in NPAs and improvement in return of assets are being given priority.

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

Government’s comprehensive 4R’s approach to strengthen PSBs and foster a culture of clean and responsible banking are now visible as the banking system has registered sharp reduction in stress and loan defaults, record recovery and steady increase in provision coverage, and is poised to further harness the benefit from large-scale resolution anticipated over the current and next financial years:

  • Recognition of restructured standard assets as NPAs was initiated with Asset Quality Review in 2015 and with discontinuation of restructuring schemes this year, the recognition exercise is nearly over with such assets declining from the peak of 7.0% in March 2015 to 0.59% as of September 2018.
  • Resolution process has been strengthened by changing the creditor-debtor relationship through the Insolvency and Bankruptcy Code and debarment of wilful defaulters and connected persons, which has resulted in record recovery this year.
  • Recapitalisation, under which, with today’s decision, total mobilisation of capital in PSBs since commencement of clean-up in 2015-16 is slated to be over ₹300000 crore.
  • Reforms have accompanied recapitalisation in the form of a comprehensive PSB Reforms Agenda that addresses the root causes of poor asset quality and commits banks to clean lending and rolling out of next-generation banking services by leveraging benefits of technology and formalisation of the economy.

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