Jaitley's 'major announcement' today could augur well for PSU banks

Mumbai: Finance Minister Arun Jaitley, who is due to make a “major announcement” on Tuesday evening, is likely to do so in relation with recapitalisation of public sector banks, said media reports.

The Finance Minister may announce the plan for raising the capital of state-owned banks like United Bank of India, UCO Bank, Corporation Bank, Allahabad Bank, Indian Overseas Bank and Dena Bank, among others reeling under the pressure of credit crunch, sources told CNBC TV18.

This announcement comes after a series of meetings between the finance minister and the Prime Minister on the worsening scenario of the public sector banks which are saddled with bad loans.

According to sources, announcements regarding recap bonds may be on the cards. Recap bonds can be sold to banks, which can then be converted into equity after a certain period and may not be considered as fiscal deficit. A similar tactic was used in the 1990s with the issue of oil and the fertilizer bonds.

Earlier in August, the Union Cabinet had decided to set up an Alternative Mechanism to oversee proposals for expeditious consolidation of public sector banks (PSBs) "so as to create large, strong lenders".  This decision followed public sector bank, State Bank of India merging its five associate banks, as also the Bharatiya Mahila Bank, with itself.