‘PSB recap plan inadequate for growth’

‘PSB recap plan inadequate for growth’

Banking reform, economy

News:

• The government’s recapitalisation plan for the 21 public sector banks (PSBs) will not be sufficient to support credit growth but will take care of the provisioning requirement for bad loans, according to Moody’s.

Important facts:

• In October last, the Centre had announced the infusion of ₹11 lakh crore in PSBs over two years, of which ₹1.35 lakh crore was to come through recapitalisation bonds.
• The government will infuse ₹65,000 crore in this financial year, following the ₹90,000 crore infusion made in FY18.
• Moody’s Indian affiliate ICRA said that with the accelerated recognition of stressed assets during FY18, the asset quality problems of the banking sector had peaked in March 2018.
• ICRA said further additions to gross non-performing assets will decline with fresh slippages falling to about 3% in FY19 compared with 7.1% in FY18 and 5.5% in FY2017.
• Moody’s estimation:

‘Modest growth’

• Moody’s said all PSBs will see their Common Equity Tier 1 (CET1) ratios exceeding the 8% minimum by March 2019, following the capital infusion.
• The relatively stronger banks will have room to grow, but the weaker ones will continue to shrink their balance sheets to conserve capital, Moody said.
• About Recapitalization plan:
• Recapitalization plan was announced in October 2017 including a reform package for PSBs.
• The reform agenda is aimed at EASE- Enhanced Access and Service Excellence. It based on following objectives:
• Customer responsiveness
• Responsible banking
• Credit offtake
• PSBs are Udyami Mitra
• Deepening financial inclusion
• Digitilization and developing personnel for brand PSB
• Reasons for introducing recapitalization plan:
• Recapitalization plan was announced mainly because the banks have failed to raise additional capital from the market.
• It may be difficult for banks to raise more capital given the substantial decline in their share prices since the beginning of 2018.
• The capacity of these banks to generate internal capital has deteriorated because of their weak financial performance and a sharp increase in government bond yields, which hurt their investment income.
• Recapitalization will help banks to tackle the NPA problem
• Impact of Recapitalisation Bonds:
• The funds mobilized from the sale of the bonds will not come as part of the fiscal deficit.