Do not rush to buy PSU banks post recap plan

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Jaitley said the government has also made a decision to capitalise public sector banks (PSBs) in a front-loaded manner, with a view to support credit growth and job creation.

"The capital infusion for the PSBs would be contingent on performance, and the whole-time directors of the PSBs would be assigned theme-wise reforms to oversee", Financial Services Secretary Rajiv Kumar said, while making a presentation about the reforms agenda.

The capital infusion is part of the massive Rs 2.11 lakh crore bank recapitalisation plan announced by the government in October previous year. For the PCA banks, he said, the principle objective appears to be that they maintain their regulatory capital and it has been the criterion followed for IDBI. There is no proposal yet to merge banks, which is another positive for stronger banks like BoB and SBI, they say. "Secondly, capital infusion will enable us to make provisions and thereby reduce net NPA, which has been one of the triggers for PCA", the IDBI Bank official said. While RBI has identified the main defaulters, about 50 major corporate behemoths some of whom have escorted Prime Minister Narendra Modi to the World Economic Forum at Davos, the reluctance on the part of the central bank to name and shame the defaulters allows them the leg space to get away without punitive actions.

"Governance reforms for state banks have been lethargic, notwithstanding the frequency of talks around changes in governance and underwriting practices at state banks", analysts at Fitch Ratings said.

While pledging 880 billion rupees ($13.86 billion) in aid to state-owned banks on Wednesday, India's Finance Ministry also handed out a set of guidelines that it wants lenders to conform to that will help clean up the financial system.

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It said the average core capitalisation for the state banks would be likely to reflect a cumulative increase of around 140 basis points.

The Government on Wednesday spelled out new banking roadmap and once again reiterated that the depositors money in the banks are safe.

"There is no fiscal impact of bond issuance to banks", Mr. Garg said. "There is not going to be a public issue".

Among the PSU lenders, while the Punjab National Bank shares cracked 7.07 per cent to Rs 180.80, Syndicate Bank ended lower by 6.92 per cent to Rs 76.70 and Bank of Baroda settled with a drop of 6.09 per cent to Rs 167.20.

Nifty PSU Bank shed almost 2 per cent with the Indian Bank (down 3.6 per cent), Punjab National Bank (down 3 per cent), Bank of Baroda (down 2.9 per cent) and State Bank of India (down 2.3 per cent) contributing most to the losses on the NSE.

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