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Capitalisation bonds may be floated to support PSBs

By:  GK Gupta (ET) , Place:  Chandigarh ,  Update:13 Sep 2017
 
NEW DELHI: The government is exploring the sale of capitalisation bonds to meet the burgeoning capital requirements of state-run lenders, mostly the weaker ones that are finding it difficult to raise resources from the market. 

“We are looking at a host of strategies to strengthen PSBs (public sector banks) and this (is) one of them,” said a senior finance ministry official. The lenders are also expected to raise money from the markets on their own, he said. Against an estimated capital requirement of Rs 1.8 lakh crore, the government is providing Rs 70,000 crore until FY19. The banks are supposed to raise the remaining Rs 1.1 lakh crore from the market. 


The government can’t afford to splurge as it’s committed to keeping the fiscal deficit at 3.2% of GDP in FY18 and at 3% in the following year. On the other hand, “the government is fully committed to captialise state-run banks,” said the official cited above, adding that discussions were at an early stage and the interest rate and tenor are still to be worked out. The government followed a similar strategy in 2008 when it sold bonds worth about Rs 10,000 crore to subscribe to 60% of State Bank of State Bank of India’s rights issue. 

Capitalisation bonds may be floated to support PSBs
 

The bonds were bought mostly by financial institutions such as the state-run Life Insurance Corporation of India. The special bonds weren’t eligible for statutory liquidity ratio status for banks and insurers. 

A Fitch Ratings report said Tuesday that state-run lenders are likely to require around 90% of the $65 billion additional capital needed by banks in India to meet Basel III capital standards. The regulatory norms will be fully implemented by the financial year ending March 2019. 
“The government will have to pump in more than double, even on a bare minimum basis (excluding buffers), if it is to raise loan growth, address weak provision cover, and aid in effective NPL (non-performing loans) resolution,” the Fitch report noted. 

Some experts said that the government may push state-run LIC to subscribe to the bonds. The insurer is close to its exposure limits in the banking sector. “There should be enough investor appetite for bonds issued by the government and this should likely attract a diversified set of investors,” said Saswata Guha, director, financial institutions, Fitch India. 

Guha noted that the major concern, however, remained the precarious position some of the state-run lenders are in. “Something needs to be done urgently to adequately capitalise these lenders and also strengthen them to take on issues such as bad loans and weak growth,” he said. 


 
 
 
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