India’s government is doubling the amount of funds it had planned to infuse into the country’s state-owned banks in the remainder of the year

• India’s Ministry of Finance has announced plans to infuse an additional ₹410 billion into the country’s public-sector banks before the end of the financial year.
  
• The extension of the additional funds, the approval for which is pending with the Parliament, will raise the total outlay for the remainder of the financial year to ₹830 billion.
  
• The funds will be raised through recapitalisation bonds, which is a government bond issued for the purpose of recapitalising public-sector banks. Apart from interest payments on these bonds, the government’s fiscal deficit will mostly remain intact.
  
• The move is mostly aimed at cleaning up the balance sheets of the weaker state-owned lenders and helping them transition out of the central bank’s Prompt Corrective Action (PCA) framework.
  

On 20 December, India’s Ministry of Finance announced that it was planning to infuse an additional ₹410 billion into the country’s public-sector banks before the end of the financial year.

The government had originally earmarked an infusion of ₹650 billion into state-owned banks this year through recapitalisation bonds, ₹420 billion of which was still left to be allocated. The extension of the additional funds, the approval for which is pending with the Parliament, will raise the total outlay for the remainder of the financial year to ₹830 billion.

The funds will be raised through recapitalisation bonds, which is a government bond issued for the purpose of recapitalising public-sector banks. Apart from interest payments on these bonds, the government’s fiscal deficit will mostly remain intact.

The impetus behind the move is manifold, but it is mostly aimed at cleaning up the balance sheets of the weaker state-owned lenders and helping them transition out of the central bank’s Prompt Corrective Action (PCA) framework. It will also raise the valuations of some banks, thereby increasing their prospects when they raise funds through equity issuances.

Most of the banks on the PCA watchlist are state-run banks given their disproportionately large share of non-performing loans in the Indian banking sector and recent history of consecutive losses. The fund infusion will prevent some banks like the Punjab National Bank that are within a hair’s length of breaching capital norms from being placed on the watchlist.

The Reserve Bank of India’s (RBI) PCA programme places credit limits on banks facing financial strain and hence, prevents a further buildup of bad loans. However, the restrictions of the framework proved to be a major sticking point between the central government and the RBI as the former argued that these banks needed to lend in order to sustain their operations and that the credit limits were leading to a shortage of financing for India’s small businesses.

As part of a truce the two parties reached last month, the RBI agreed to review the restrictions imposed on banks under the PCA framework.

The additional funding is expected to help certain banks like the Oriental Bank of Commerce, Dena Bank, which is about to merge with Bank of Baroda and Vijaya Bank, and Bank of Maharashtra achieve the minimum capital strength and non-performing loan ratios required to exit the PCA.

Speaking on the benefit of additional funding, India’s finance minister Arun Jaitley told reporters, “now the downward slide in the NPAs would commence”.

The move isn’t expected to garner unanimous support. It has been speculated that it might be too early to take some banks off the PCA watchlist. However, the finance ministry has been sure to tout the improved performance of public-sector banks in the past few quarters and their loan recoveries as justification.

The finance ministry said that public-sector banks had doubled the amount of loans recovered in the first six months of the financial year to ₹607.3 billion, while their gross non-performing loans fell by ₹238.6 billion.


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