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Centre may redraw bank recapitalisation plan in wake of new challenges

The government may redraw the recapitalisation roadmap for public sector banks (PSB) in the current fiscal as the institutions face additional burden to meet interest on interest obligation for all its borrowers while changes in valuation norms AT1 bonds by Sebi will make the instrument less attractive for banks to raise their capital.

Sources said that the finance ministry has already started a preliminary exercise to determine the capital requirement of banks in wake of the changes in norms and rise in bad assets during the time of the pandemic. Based on the inputs received by banks, additional capital may be provided to them from budgetary resources.

The Budget allocated Rs 20,000 crore towards recapitalisation of PSBs to help them consolidate their financial capacity. Some balance from previous year towards recapitalisation is also available for disbursement. Moreover, PSBs have proactively built buffers during financial year 2020-21 (FY21) to improve their resilience in the face of the shock from the pandemic. But despite this, banks will need more capital infusion from the government for business growth and to meet regulatory norms.

The problem has been accentuated with the Reserve Bank of India now writing to bank to meet their obligation towards interest on interest for all borrowers where exposure is over Rs 2 crore as well. This will put additional burden of close to Rs 7,500 crore on banks.

Moreover, the SEBI, though has amended the valuation rule of perpetual bonds in line with objections raised by the finance ministry, it still has said that from April 2023 onwards, the residual maturity of AT-1 bonds will become 100 years from the date of issuance of the bond. This will make the most used route of raising capital by banks less attractive.

On its part, the government is strengthening the banking segment by merger and amalgamation of PSBs. Since 2017, this exercise has resulted in seven large and five smaller PSBs. The measures (based on bad loans and regional factors) were intended to help manage capital more efficiently. But emerging regulatory needs and pandemic affected businesses continue to pose challenges for banking segment.