Bank recap fails to enthuse stocks

Ashley Carr
January 26, 2018

Jaitley said the government has also made a decision to capitalise public sector banks (PSBs) in a front-loaded manner, with a view to support credit growth and job creation.

Rajeev Kumar, secretary, department of financial services, said bank recapitalisation is dependent on performance and reforms undertaken by the lenders.

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.

IDBI Bank, which is among those facing PCA, received the highest amount of capital, amounting to Rs 10,610 crore.

On recapitalisation of PSBs, Jaitley said that "We wish to build an institutional mechanism to ensure that the problems that we inherited do not recur".

There will be a separate stressed asset vertical in each of the PSBs for cleaner and timely recovery. "However the capital ratios of the bank (s) is unlikely to improve by an equivalent amount as a portion of this capital will be off-setted against the losses because of elevated credit provisions the banks will be required to make", says Singh.

Of the funds to be injected by March, the government will raise 800 billion rupees by issuing recapitalization bonds, which will not be tradeable in markets, and provide an additional 81.4 billion rupees from its budget.

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"As far as we are concerned, we are adequately capitalised at this point in time and don't really need the capital", said P.K. Gupta, Managing Director of State Bank of India. While RBI has identified the main defaulters, about 50 major corporate behemoths some of whom have escorted Prime Minister Narendra Modi to the World Economic Forum at Davos, the reluctance on the part of the central bank to name and shame the defaulters allows them the leg space to get away without punitive actions.

Earlier, Union Bank had tied up with KBC Participations Rental SA to form KBC Asset Management Company, where the Belgian firm held 49 per cent in the asset management business. For the PCA banks, the principal object appears to be that they maintain their regulatory capital.

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).

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. "Small banks could do well in the near term, given the quantum of capital; however, returning to normalised return on equity will probably take a long time", the report warns.

"There is no fiscal impact of bond issuance to banks", Mr. Garg said.

Oriental Bank of Commerce would get Rs 3,571 crore, Dena Bank Rs 3,045 crore, Bank of Maharashtra Rs 3,173 crore, United Bank of India Rs 2,634 crore, Corporation Ban Rs 2,187 crore, Syndicate Bank Rs 2,839 crore, Andhra Bank Rs 1,890 crore, Allahabad Bank Rs 1,500 crore, Punjab and Sind Bank Rs 785 crore.

Other reports by My Hot News

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