The head office of State Bank of India in New Delhi. Photo: Reuters
The head office of State Bank of India in New Delhi. Photo: Reuters

Indian government’s Rs 2.1 trillion (US$ 32 billion) recapitalization plan for state-owned public sector banks is expected to favor stronger banks over weak ones. While weaker banks are likely to be capitalized only to cover their provisioning requirements, stronger ones would be provided capital for growth as well, reports Business Standard.

Through this massive capital infusion, the government expects to increase lending activity especially to small and medium enterprises.

The government will provide the funds to state-run lenders over a period of two years. Under the current plan, the Indian government will offer Rs 1.35 trillion (US$ 20.8 billion) recapitalization bonds and Rs 0.76 trillion (US$ 11 billion) from budgetary support and fund-raising in the capital markets.

According to Rajnish Kumar, Chairman of India’s leading public sector bank State Bank of India, the capital infusion will come with caveats around better performance, strengthening of organizational structure and improvement in risk management, reports Economic Times. He also felt the recapitalization move will make banks more aggressive in resolving bad loans.

Earlier, Fitch Ratings had called the government’s recapitalization plan a significant change from the ‘drip-feed approach’ pursued over the past few years. It felt this measure should help address the capital shortages that are a major negative influence on the viability ratings of the banks.

However, it felt the lending growth is likely to remain weak, at least in the short term, as banks will prioritize asset resolution and provisioning over expansion.

Fitch said the recapitalization bond could affect the government’s target to reduce fiscal deficit to 3.2% of GDP this year. “The recapitalization plans could make this target more difficult and the central government may have to cut expenditure elsewhere,” the report said.