FINANCE MINISTRY ANOUNCES BANK RECAPITALIZATION OF

RS 76 BILLION INTO SIX WEAK PSBs

INTRODUCTION

A proposal for infusion of Rs 76 billion into six weak Public-Sector Banks or PSBs has been
approved by the Indian Finance Ministry under the government’s ‘Indradhanush’ plan.

BACKGROUND

During the year 2016-17, nine out of the twenty-one public sector banks reported losses, which
includes Bank of India, IDBI Bank and UCO Bank. According to reports, IDBI Bank incurred
a loss of Rs 5158 crores where as Indian Overseas Bank reported a loss of Rs 3147 crores last
year. Bank of Maharashtra, Central Bank of India, Dena Bank and Oriental Bank are among
the other banks that have suffered losses.

The current scheme falls within the ‘Indradhanush’ scheme announced in 2015, under which a
total sum of Rs 700 billion is promised for a period ending in March 2019.The Finance Minister
plans to advance Rs 180 billion to their aid in the coming two years. The scheme aims to bring
the state-owned banks in line with the global risk norms.

An amount of Rs 518.58 billion has already been invested previously in years 2015-16 and
2016-17.

THE PROPOSAL

Six state-owned banks have been chosen that are under the prompt corrective action of Reserve
Bank of India (RBI). RBI usually puts those banks under this category of prompt corrective
action (PCA) when it banks fail to maintain minimum standards in regards to capital, returns
on assets and size of non-performing assets, etc.

The government has undertaken the task to recapitalise all state-owned banks in general.
However, while it still decides the logistics for the same, it felt the need to already release funds
for these chosen banks to enable them to meet their equity requirements and resume normal
business.

According to the proposal, the capital is to be raised by way of issuing preferential shares.
Regulatory approval and approval from shareholders is still required before the funds can be
advanced. Three of these banks have already approved of this infusion.

The board of directors at UCO Bank have approved issue of equity shares on preferential basis
to the government of India against a consideration of Rs 1375 crores. Central Bank of India
has also approved issue of preferential shares worth Rs 323 crores at a premium of Rs 73.15.
Bank of Maharashtra has approved preferential allotment of shares worth Rs 650 crores to the
government, subject to approval by shareholders.

The government wishes to compliment this scheme with issuance of recapitalisation bonds and
strengthen the state-owned banking sector. It is hoped that the capital infusion allows these
banks to build their provision coverage ratios as well as regain market access.