Bank recap and reform plans unveiled

The Indian government unveiled a bank recapitalization plan with an infusion of capital of more than INR 88,000 crore in the current financial year. The plan will be applicable to 20 state run banks and it has been linked to a reform agenda in order to restore the health and step up lending to aid growth.

In 2017, the government announced a package to help public sector banks through INR 2.11 lakh crore infusion in order to provide them capital for lending and reviving investment which is very crucial for job creation in India. According to the plan, the government will use recapitalization bonds worth INR 1.35 lakh crore in the next two years. Additionally, it will provide support of INR 18,000 crore and the balance INR 58,000 crore will be raised by banks. Arun Jaitley, finance minister mentioned that the role of the government is not only to find a solution but to create an institutional mechanism in order to make sure that the problems that occurred in the past are not repeated. The objective of the exercise is that the government has the responsibility of keeping the banks in good health.

With a capital infusion of INR 80,000 crore through recapitalization bonds and INR 8,139 crore as budgetary support, the government aims to help public sector banks in the country. It will also raise INR 10,312 crore through the sale of shares. The government expects that the measures undertaken will help the additional credit takeoff capacity of the banks by more than INR 5 lakh crore.

This agenda is aimed at EASE, enhanced access and service excellence and it focuses on six themes of credit offtake, customer responsiveness, responsible banking, deepening financial inclusion, digitalization, UdgamiMitra for small and medium enterprises and developing personnel. Additionally, the government also plans to launch a survey in order to monitor the rollout of reform measures about the improvement in service quality. The results will be published every year.

With the infusion of capital by the government, there will be an improvement in the performance of PSBs on the reform. Banks will also need to tie up with agencies for the monitoring for clean and effective post sanction follow up in the loans exceeding INR 250 crore. All the banks will also be required to set up a stressed asset management vertical and corporate lending will have to follow the route of due diligence.