PSU financial institution shares fall after recapitalisation plan announcement

"Banks have started the process already and about 41 operations they have made a decision to rationalise", said Financial Services Secretary Rajiv Kumar.

The government lent a hand to weak public sector banks with the first tranche of its Rs. 2.11 trillion recapitalisation plan on Thursday, albeit with riders which includes giving more loans to SMEs. The funds will be infused through a mix of budgetary allocation amounting to Rs 8,139 crore and recap bonds valued at Rs 80,000 crore in the current fiscal. "Our objective was to find solution and create an institution so that the mistakes are not repeated", he said. There will also be a separate stressed asset vertical in each bank to contain non-performing assets.

Mr. Kumar said the recapitalisation amount for PCA banks would be used for support to maintain their regulatory capital requirements, and to strengthen their governance and operations.

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Going forward, each bank will adopt a board approved policy as per its core strength and monetise their non-core activity, he said, adding that many banks have identified various non-core assets and started monetising them. It said the recapitalisation would be dependent on performance and reforms. Banks had until March 2017 to clean up their books to be eligible for capital infusions.

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. "It may also be credit positive for the bank, depending on how it uses the capital", the rating agency's credit analyst Nikita Anand said.

Calling public sector banks an "article of faith", the Finance Ministry on Wednesday reassured depositors that their money in these banks is safe and no state-owned bank would fail.

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It said the average core capitalisation for the state banks would be likely to reflect a cumulative increase of around 140 basis points. These bonds will be non-tradable and not carry the status of an SLR (Statutory Liquidity Ratio) security. These will be swap deals and cash neutral.

The government will issue recapitalisation bonds of 6-10 years maturity.

Other banks that will receive the capital infusion during this phase are Canara Bank, Indian Overseas Bank, Union Bank of India, Oriental Bank of Commerce, Dena Bank, Bank of Maharashtra, United Bank of India, Corporation Bank, Syndicate Bank, Andhra Bank and Allahabad Bank in the range of 4,865 crore rupees to 1,500 crore rupees.

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As the National Stock Exchange on Wednesday, IDBI Bank stock ended up 5.65 per cent at Rs 65.40, State Bank of India up 3.76 per cent at Rs 330.05 and Punjab National Bank up 5.19 per cent at Rs 195.45.

  • Kelly Blake