High Dividend Paying Banks most likely to receive Recapitalisation Funds

November 6, 2017

The government is planning its recapitalisation programme of public sector banks (PSBs) in such a manner that funds will be allocated largely to those lenders that will pay large dividends.

The objective is to ensure that the capital infusion will be neutral on the fiscal deficit.

The recapitalisation is in the form of a book entry with banks buying bonds from the government and the latter pushing the money back into the lenders’ balance sheet by subscribing to equity capital. Since the bonds will be balanced with the equity, the fiscal deficit will go up only to the extent of interest that the government will pay out on these bonds. By ensuring that there is dividend income, the government is trying to keep the entire capital infusion from widening the fiscal deficit.

According to the CEO of a PSB, the government has already sounded out some lenders that the ability to pay dividend will be a criteria in allocation of capital. Last week, the government announced a Rs 2.11-lakhcrore recapitalisation plan for PSBs over two years. Of this, Rs 1.35 lakh crore will be financed through recapitalisation bonds, Rs 18,100 crore through the Budget and Rs 58,000 crore through capital-raising by banks.

Among the nationalised banks, some like Bank of Baroda and Canara Bank have declared dividend in 2017. Several others had last declared dividend in 2015.

After the recapitalisation announcement, SBI chief economist Soumya Kanti Ghosh pointed out in a research report that its burden on the fisc would be very limited, going by the experience in the 1990s.

“During 1986 till 2001, interest paid by the government to the nationalised banks on recap bonds works out to 0.07% of GDP per annum on average.

But, during the period, the banks have paid dividends to government amounting to 0.06% of GDP on average. So, the net impact was only 0.03% of GDP on fiscal deficit, almost nil. Also, coupon payments aid the profitability of banks in strict accounting sense,” Ghosh said in the report. Some of the banks with good earnings find themselves stuck because of large bad loans.

They have to make provisions on these loans — they cannot recognise any interest they earn as income and can resume dividends as soon as the bad loans are provided for or resolved.

According to Nomura economist Sonal Varma, the funds allocated by the government are not just for cleaning up books but also include growth capital.


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