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PSU banks surge on recapitalisation plan; Central Bank of India up 11%, Allahabad Bank gains 8%

Updated : August 26, 2019 11:48 AM IST

The Nifty PSU Bank index rose over 6 percent after the government announced a Rs 70,000 crore recapitalisation plan

The measures come in an effort to save the weakening economy amid a consumption slowdown.

All constituents of the index were trading in green with Central Bank of India rising over 11 percent.

The Nifty PSU Bank index rose over 6 percent on Monday after finance minister Nirmala Sitharaman announced a Rs 70,000 crore recapitalisation plan for PSU Banks. The index rose as much as 6.4 percent intraday, while the benchmark Nifty was up 0.72.

All constituents of the index were trading in green, with Central Bank of India rising over 11 percent and Allahabad Bank nearly 8 percent. Meanwhile, Syndicate Bank, J&K Bank, Indian Bank, Oriental Bank of Commerce, and SBI were all up in the range of 3-6 percent.

Sitharaman announced a slew of measures to pump the economy. Additional lending and liquidity to the tune of Rs 5 lakh crore can be made available by providing this capital for the PSBs. "It will strengthen and help corporates, MSME, retail borrowers, and small traders," the FM said.

The measures come in an effort to save the weakening economy amid a consumption slowdown.

While the Reserve Bank of India had been cutting down the repo rate every quarter, the banks were not passing on any the rate cut to the borrowers. The banks have now agreed to grant this benefit, she observed.

"The banks have now decided to pass on any rate cut through MCLR reduction to benefit all borrowers. This will result in reduced EMIs for housing loans, vehicles and other retail loans, by directly linking repo rates to the interest rates," Sitharaman added. "Within 15 days of closure of the loan amount, all papers to be given back to the customers," she said.

An upfront recap of PSU banks within budgeted levels, refinancing lines to housing financiers, and support for a credit guarantee for non-banking financial companies (NBFCs) are three of the key positives from the announcements, CLSA said in a research report.

The report added that “capital infusion of Rs 700 billion in PSU banks is to be upfront rather than late in the year. This would mostly be via recap bonds, so it would be cash and fiscal-neutral."

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