PSB bailout package

Govt asks PSBs to seek external funding after current $32 billion bail-out package is exhausted

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The Indian Government recently conveyed to State-run banks that they’ll have to seek external funding options after the current bailout package provided by the government is exhausted.  

The government funded a $32 billion bailout package to as many as 21 state-run banks that are reeling under bad loans,  a reducing asset base, and a reduced credit capacity.

State-run public sector banks account for more than two-thirds of financial lending in the country, but also contribute to a whopping 90% of loans that have gone bad. With Non-Performing Assets of these state-run banks only rising, the government directed the banks to look for funding or bail-out packages through other means – either by selling their assets, or by way of merging, possibly the only way that these banks can recover from bad loans that only seem to spiralling out of control, increasing their woes.

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In October 2017, the Finance Ministry intervened to provide a much needed breather for these banks, extending a $32 Billion bail-out package, which it plans to infuse in more than one phase. Currently, the government has designated an amount of $14 billion to be infused in the first phase for banks to compensate for bad loans and boost credit capacity.

In order to reduce the burden on state-run banks and increase their credit capacity, the government plans to merge multiple banks (21 currently) to give rise to just 12 or 13 banks. Banks dogged by bad loans will be merged with banks that are performing relatively better, reducing the number of state-run banks and evolving more seamlessness in the banking domain.

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As of December 2017, Non-Performing Assets of Indian banks stood at an unimaginable 8.5 Lakh crore, with several factors to be blamed for the misfortune including bad lending practices, inability to make recoveries, and industries availing loans falling into disrepute and not having the capacity to repay them.

Further, the government is also planning on making imperative amendments to existing bankruptcy laws that are at best immature and unable to make visible impacts. An essential proposal in this regard is to allow for a resolution under the law if just 66% of creditors vote for it, against current provisions that require 75% of creditors to vote in order for a resolution to come through.

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