Capital infusion in PSUs: Govt approves second tranche, tightens guidelines

The first tranche was released with object of enhancing their lending operations and also enable them to raise money from the market. Under the government's Indradanush roadmap, announced last year, the government will infuse Rs 70,000 crore in PSUs over next four years.

However, with its second infusion, the government also wants PSUs to start minding their ways.

What government wants

With its second round of infusion, the government has also ‘hardwired’ the Memorandum of Understanding (MoU) it has signed with the banks.

According to a report in the Livemint, Department of Financial Services sent a letter to these banks highlighting the conditions that banks need to meet in order to meet their part of the deal.

Signed March 16, the letter details 5 key parameters for the banks:
> Active bad loan management
> Review branches and shut loss-making ones.
> Pairing employee benefits including pay hikes, if needed.
> Raising and arranging capital from the market.
> Continuous plans for selling off non-core assets.

What banks are doing

The banks too have started scurrying around to meet the March 31 deadline to clean their balance sheets. Last month saw a rise in number of joint lender forum (JLF) meetings as banks work to clean bad loans worth Rs 15,000 crore, says a media report. Even with some good assets on sale by lenders, pricing continues to be an issue between the banks and ARCs.

As of December 31, 2016, banks have non-performing loans worth Rs 7 trillion on their books.

Banks were asked to form JLFs in case of involvement of multiple banks and where the delay in repayment had excessed 60 days. The forums are expected to resolve the issue within a specified time frame.According to Mint, these meetings are focused on resolution of

According to Mint, these meetings are focused on resolution of stressed asset sale.

At the same time, banks are unwilling to take large haircut as they are not convinced that they will protected against investigative agencies. Earlier this year, CBI had arrested IDBI Chairman Yogesh Aggarwal alongwith former executives for lending money to Kingfisher Airlines.

Expert calls

However, even with the deadline, analysts do not see the bad loan pain ending anytime soon for the banking system. In last year itself, bad loans surged 56.4 percent, according to Care Ratings.

Rating agency Moody’s and ICRA both see asset deterioration as the key challenge for banks in the medium-term. NPLs and standard restructured loans are expected to rise, according to Moody’s.

It expects stressed assets to increase by another 100-150 basis points in next 12-18 months.

Vinod Rai, the chief of Bank Boards Bureau, has also written a scathing letter to the Finance Ministry raising red flag over little progress made by banks to resolve NPA issue. He also highlighted possible way ahead for the banks.

Rai believes the present Scheme for Sustainable Restructuring of Stressed Assets (S4A) needs to be liberalised further and banks need to be held accountable for their actions.

BBB is also not in favor of a bad bank, a suggestion put forth in this year’s Economic Survey. Rai said that the public sector lacks expertise needed for a bad bank as well as decision making will be an issue.

Dolat Capital says that credit growth continues to be muted at 4 percent, lowest in 24 months according to Reserve Bank data.

“While clean-up exercise and consolidation of balance sheet continue to be mainstream agenda for both PSU and private, liberalising higher S4A should further hike provisioning coupled with subdued credit growth trends to pressurize near term earnings,” Dolat Capital said in a note.