Last October 2017, the Indian finance ministry had announced Rs.2.11 lac crore recapitalisation plan for public sector banks. The senior official recently told that the initiation of this will start for state-owned banks by infusing capital and government will raise Rs.70000 crore by February 2018 as a portion to Rs.1.35 lacs crore to be raised through bonds while Rs.58000 crore would be raised by PSU banks themselves.
The finance ministry official told, “It was already stated that most of the amount will be front loaded so as to pass on the maximum benefit to the lenders.”
He further added, “The government will directly issue these bonds and the impact on the fiscal will be discounted given the increase in credit growth and subsequent pickup of the economy.”
What will be the impact?
The amount government will have to pay on the bonds can have direct and immediate impact on the upcoming budget in 2018. It can take direct hit on fiscal deficit. Growth capital will be provided to banks which will perform well.
It can also impact stock market as 10-12 PSU Banks are allowed to raise capital through markets. Punjab National Bank is already allowed to raise a capital of Rs.5000 crore through Qualified Institutional Placement (QIP). Bank of India, Union Bank, Andhra Bank and Bank of Baroda are other banks being included in the list. This QIP capitalisation will be done in next two months.
A former director of Central Bank of India told, “It has been mostly seen that the issue is subscribed by LIC, which is again public money. Once banks are strengthened, they may find more investors.”
The finance ministry believes that the consolidation of Public Sector Banks will only begin after the balance sheet of banks improves and they become financially stronger by reducing bad loans assets.