PSU bank stocks tumble up to 7% on recap announcement

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Jaitley said the government has also chose to capitalise public sector banks (PSBs) in a front-loaded manner, with a view to support credit growth and job creation. Kumar also said that the regulatory capital of all PSBs will be maintained and the government will not let them fail.

Rajeev Kumar, secretary, Department of Financial Services, said the government will infuse Rs 88,139 crore capital into PSBs by March 31, but recapitalisation will be tied to performance and reforms.

That is part of a larger two-year 2.11-trillion-rupee ($33.1 billion) recapitalisation plan announced last October.

IDBI Bank, which has a Gross Non Performing Assets (NPA) ratio of 24.98 per cent, will receive the highest capital infusion of Rs 10,610 crore, followed by Bank of India getting Rs 9,232 crore and State Bank of India getting Rs 8,800 crore.

Finance minister Arun Jaitley said steps need to be taken to ensure that the governance of banks follows the highest standards.

While the logic for bank recapitalisation is fiscally strong, and indeed the only viable option, it's the manner and layout of the allocation that should ring a few alarm bells.

Mr Kumar said, the Finance Ministry would gauge the performance of banks on parameters like customer responsiveness, responsible banking, credit off-take, MSME lending, deepening financial inclusion and digitalisation. "The original decision stands, it has not been reconsidered but then there is always a time in implementing the decision", Jaitley said. "This should allow these banks to make proper provisions on their bad loans, helping to clear system asset quality", says a Morgan Stanley report.

He said, every deposits of the people in banks are safe as banks are the article of faith.

Indian Bank, a smaller but profitable state-run lender, was the only bank to have not been allocated any capital in the latest round. These bonds will be non-tradable and not carry the status of an SLR (Statutory Liquidity Ratio) security, Economic Affairs Secretary Subhash Chandra Garg said.

The government will issue recapitalisation bonds of 6-10 years maturity. Also, recap bonds would not impact the fiscal deficit target as IMF's rules classify such debt as "below-the-line" financing. But the programme goes beyond infusion of money as the ministry informed that the recapitalisation will be "accompanied" with reforms at public sector banks.

Nifty PSU Bank shed almost 2 per cent with the Indian Bank (down 3.6 per cent), Punjab National Bank (down 3 per cent), Bank of Baroda (down 2.9 per cent) and State Bank of India (down 2.3 per cent) contributing most to the losses on the NSE.