It announced that Rs 1,35,000 crore would be infused through recapitalisation bonds, which would be issued by the government and would be subscribed by public sector banks in lieu of the capital they get from the government.
Another Rs 10,312 crores funds will be raised from the market for the current fiscal, taking the total capital inflows to around Rs 1 lakh crores in 2017-18. "The entire objective of this exercise has been that it is government's prime responsibility to keep PSBs in good health", Jaitley said.
Yet, the most perplexing question is this: why is the IDBI bank, which has the highest percentage of bad loans/NPAs, at 24.98 per cent, receiving the maximum capital infusion of Rs 10,610 crore?
Indian Overseas Bank, which received Rs 4,694 crore and was the first to face PCA, welcomed the move.
The decision to front-load around $12 billion through recapitalisation bonds would put banks in a slightly better position to absorb losses expected from resolution of NPLs.
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Edelweiss Securities also noted that recap being more than 70% of market cap for several banks and that too at levels below existing book value will lead to significant book value dilution risks for many banks upwards of 20 per cent (advantage IDBI, PNB).
The finance ministry will raise 800 billion rupees through recapitalisation bonds, and provide 81.4 billion from its budget to recapitalise the banks, Kumar said.
"The capital infusion for the PSBs would be contingent on performance, and the whole-time directors of the PSBs would be assigned theme-wise reforms to oversee", Financial Services Secretary Rajiv Kumar said, while making a presentation about the reforms agenda.
Of course, the government has justified the higher capital ratio for weak banks saying it's only for the minimum capital requirement bar. For the PCA banks, the principal object appears to be that they maintain their regulatory capital.
Siddharth Purohit, research analyst with SMC Institutional Equities, believes banks have received adequate funds, which should improve their balance sheets.
A survey by an independent agency will be conducted to measure public perception about improvements in access and service quality.
There will be a separate stressed asset vertical in each of the PSBs for cleaner and timely recovery.