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Reserve Bank Governor Raghuram Rajan on Friday (31 July) said Rs 25,000 crore of capital infusion planned by the government in public sector banks this fiscal is "adequate and a good beginning".
Rajan Welcomes Rs 25,000-cr Govt Lifeline To PSU Banks; Shares Rejoice
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While Finance Minister Arun Jaitley had in Budget for 2015-16 provided Rs 7,940 crore towards recapitalisation of PSU banks, he on Friday (31 July) sought Parliament nod for another Rs 12,010 crore in the first supplementary demand for grants.
Another Rs 5,000 crore will be provided in subsequent supplementary demand through the year totaling Rs 25,000 crore of capital infusion.
"Allocation for first-year recapitalisation is adequate," Rajan said when asked to comment on the infusion plan.
"It's a good beginning," he said after his customary meeting with Jaitley ahead of the third bi-monthly monetary policy on August 4.
High levels of non-performing assets in state-run banks have made it hard for the government of Prime Minister Narendra Modi to revive investment or accelerate growth in Asia's third largest economy. State-run banks have amassed bad loans at a faster pace than their privately owned peers, raising concerns about their ability to meet tougher global regulatory capital requirements.
This month, credit rating agency Fitch said the capital needs of state-run banks were likely to increase substantially each year until 2018/19. Last month, Morgan Stanley said the government would need to inject $15 billion across all state banks "urgently" to achieve a common equity Tier-1 ratio of around 10 per cent. It was not immediately clear where the extra money would come from.
After initial hesitation, Jaitley agreed with a plea by the Reserve Bank of India to provide more capital to banks.
The country's top six banks — State Bank of India (SBI), Bank of Baroda, Punjab National Bank, Bank of India, Canara Bank and IDBI will get 40 per cent of the total amount that the government plans to spend this fiscal year, it added. All banks will get financial support from the government, 20 per cent of the fund allocation will be tied to performance. After the announcement, shares of State Bank of India rose as much as 6.3 per cent, while shares of Bank of Baroda were up 5 per cent.
The Finance Ministry, in a statement, said public sector banks (PSBs) as of now are "adequately capitalised", but would need Rs 1,80,000 crore extra capital over the next four years (up to FY19).
Of this, the government plans to provide Rs 70,000 crore through budgetary support -- Rs 25,000 crore each in current and next fiscals and Rs 10,000 crore each in 2017-18 and 2018-19.
Banks would be required to raise the remaining amount of Rs 1.1 lakh crore from the market, the statement said.
RBI Deputy Governor R Gandhi said the decision to infuse Rs 70,000 crore over the next four years was a welcome move by the government.
As for the Rs 1.1 lakh crore required to be tapped by banks over the next four years, he said there was enough appetite in the market for that.
Banking Shares Surge
Banking shares mainly public sector undertakings (PSU) were trading higher by up to 5 per cent on the bourses after the Finance Minister Arun Jaitley said that the government will infuse capital in public sector banks in the next three to six months.
Union Bank of India (up 5 per cent at Rs 158), Punjab National Bank (4 per cent at Rs 144), Bank of Baroda (3.7 per cent at Rs 152), Syndicate Bank (3 per cent at Rs 108) and Oriental Bank of Commerce (3 per cent at Rs 189) have rallied between 3-5 per cent, while Allahabad Bank, Canara Bank, IDBI Bank, Bank of India and State Bank of India (SBI) were up 1-2 per cent on the National Stock Exchange (NSE).
At 0945 hours, CNX PSU Bank index was up 2% compared to 0.30 per cent rise in the CNX Nifty.
The finance ministry estimates that banks will have to raise about $17 billion from the market over four years to meet total funding requirements of about $28 billion beyond projected profits.
Minister of state for finance Jayant Sinha told reporters the additional capital infusion for the banks would help meet regulatory requirements as well as growth needs. The government could provide more capital to the banks, if needed.
"We have a robust recapitalisation plan in place," he said.