On the eve of the Independence Day, the Government unveiled a series of steps to revive Public Sector Banks (PSB) and allayed fears of any panic over their mounting bad debts. With inflation continuing on its downward trajectory and macroeconomic parameters turning positive, the Government hopes that the revival of the State-run banks will provide the right impetus to the economy.
The banks have been crippled by rising NPAs and their shares have almost halved over the last one year. The Government announced a seven-point plan, including Rs20,000 crore immediate fund infusion, creation of a single holding company and minimising political interference.
Announcing the revamp plan named “Indradhanush” that also includes setting up of a Bank Board Bureau (BBB) for broad-level appointments and a performance-based monitoring mechanism, Finance Minister Arun Jaitley said, “Even though challenging situation did exist, there is no cause for panic...Cause for panic or alarm does not exist.”The Reserve Bank of India (RBI) has announced that it will transfer its surplus profit of Rs65,896 crore to the Central Government.
Also, the Government will set up a Bank Investment Committee, which will act as a holding company for shares on behalf of the Government.Jaitley said the problem of the bad loans, which has remained unattended by the previous Government, can be attributed to the slowdown in some sectors. “Since the present Government took over, our policy was that commercial decisions must be taken on commercial considerations and the level of political interference in the functioning of banks have to be minimised.”
Pointing out that the Government has been taking steps to deal with the problem of bad loans and improve the health of the State-owned banks, Jaitley said, “The Government has been from time to time reviewing health of these banking institutions. The nature of the problem is such that some initiatives which we have taken, it has partly been fixed and it is capable of being fixed.”
In order to bring in the best of talents to head the State-run banks, the Government also announced appointment of two private sector bankers to head Bank of Baroda and Canara Bank while also making appointments to three other large State-run banks from within the Government sector.
The Government has decided to inject Rs70,000 crore in PSBs in four-year period starting this fiscal with Rs25,000 crore, of which Rs20,000 crore would be given within a month. The remaining Rs5,000 crore would come in the last quarter of this fiscal. Of this Rs25,000 crore each will happen in 2015-16 and 2016-17 and Rs10,000 crore each in 2017-18 and 2018-19.
Of the Rs25,000 crore allocated this fiscal, the distribution of Rs5,000 crore among eight banks would be decided in the fourth quarter after looking at the performance of various banks in the first nine months. “Eight banks, which did not get any capital in first two tranches will get preference in third tranche,” Financial Services Secretary Hashmukh Adhia said.
The Government has estimated capital requirement of PSU banks over four year period at Rs1.80 lakh crore. Of this, banks would have to raise Rs1.10 lakh crore from the market.
The RBI said in a statement, following a meeting of its central board chaired by Governor Raghuram Rajan. India’s central bank, whose accounting year goes from July to June had, last year, transferred Rs52,679 crore of its surplus profit to the Government, “The central board of directors of the Reserve Bank of India, at its meeting held today (Thursday), approved the transfer of surplus amounting to Rs658.96 billion for the year ended June 30, 2015 to the Government of India,” .
Adhia said this estimate is based on credit growth rate of 12 per cent for the current year, and 12-15 per cent for next three years depending on the size of the bank.Giving details of the seven-point agenda for revamp of PSBs, Adhia said, “As of now, the PSBs are adequately capitalised and meeting all the Basel III and RBI norms. However, the Government wants to adequately capitalise all the banks to keep a safe buffer over and above the minimum norms of Basel III.”
If we exclude the internal profit generation which is going to be available to PSBs (based on the estimate of average profit of the last three years), the capital requirement of extra capital for the next four years up to 2018-19 is likely to be about Rs1.8 lakh crore, he said.
On destressing banks, Adhia said, “Various steps have been taken to bring down non-performing assets (NPAs) in infrastructure sector which is primarily responsible for rising bad loans. Many steps have been taken to reduce NPA in power and state discoms, he said, adding, “We have started the process of dialogue with the discoms”.
Identifying the area which are giving stress to the PSU banks, Jaitley said, “It was sectors such as steel, power, highways, discoms, to a lesser extent sugar, which were predominately responsible for the stress and therefore to resolve the whole issue and find a solution to this you need to deal with banks as an institution, you also need to deal each of these sectors.”
There are positive movements as far as the highway sector is concerned and the large amount of public investment going into the sector has got the sector moving, Jaitley said.“We have in the last few months taken some steps with regard to the steel sector. But the problem with regard to steel sector is really on account of the external factors. And therefore steps being taken also relate to that,” he said.
The Government is continuously monitoring the situation as far as private sector power companies are concerned as also the discoms and some States have to have some urgent reform measures as far as discoms are concerned, he added.Asked about merger of the Bharatiya Mahila Bank with the SBI, Jaitley said that no decision has been taken yet.
Giving the break-up of the proposed capital infusion of Rs20,088 crore into 13 PSU banks within a month’s time, Financial Services Secretary Hasmukh Adhia said the country’s largest lender the SBI will get a hefty Rs5,531 crore..
Under the allocation plan, Bank of India will get Rs2,455 crore, IDBI (Rs2,229 crore), Indian Overseas Bank (Rs2,009 crore), Bank of Baroda (Rs1,786 crore), PNB (Rs1,732 crore), Union Bank of India (Rs1,080 crore), Canara Bank Rs947 crore) and Corporation Bank (Rs857 crore).
Moreover, Dena Bank will get Rs407 crore, Bank of Maharashtra (Rs394 crore), Andhra Bank (Rs378 crore) and Allahabad Bank (Rs283 crore).
The Financial Services Secretary said it is presumed that the emphasis on PSBs financing will reduce over the years by developing a vibrant corporate debt market and greater participation of private sector banks.