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India: Financial System Stability Assessment—Supplementary Information

Author(s):
International Monetary Fund. Monetary and Capital Markets Department
Published Date:
December 2017
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This supplement provides additional information that has become available since the Financial System Stability Assessment was circulated to the Executive Board. The thrust of the executive summary remains unchanged.

On October 24, 2017, the Government of India announced a major recapitalization plan for domestic public sector banks (PSBs). The plan amounts to Rs 2.1 trillion (approximately $32 billion or 1.3 percent of GDP), and entails issuance of Rs 1.35 trillion in government recapitalization bonds to PSBs; budgetary support of Rs 180 billion; and the raising of Rs 580 billion in the equity market by PSBs (the latter in effect diluting the government’s ownership share) over the next two years.

An upfront recapitalization of PSBs is in line with the FSAP’s recommendations. The size of the envisaged capital injections is expected to largely address the PSBs’ recapitalization needs, estimated at 0.75–1.5 percent of GDP by the FSAP stress tests; help accelerate the resolution of distressed assets; and support the PSBs’ ability to resume lending and a revival of corporate investment, particularly for SMEs that have been affected negatively by PSBs’ lending constraints. Further details on the restructuring plans and conditions of the recapitalization plan are yet to be announced.

On November 1, the Government of India announced the establishment of an Alternative Mechanism panel, headed by India’s Finance Minister, to seek consolidation across state-owned banks. The panel is expected to direct the PSBs to examine merger proposals (benefitting from inputs from the Reserve Bank of India) and devise its own procedures for the appraisal of banks’ merger proposals. This is consistent with the FSSA’s call for a broader restructuring of the PSBs, in addition to recapitalization.

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