The government lent a hand to weak public sector banks with the first tranche of its Rs. 2.11 trillion recapitalisation plan on Thursday, albeit with riders which includes giving more loans to SMEs. These riders might lead to future NPAs coming from responsible lending to this sector.

A total of Rs. 88,139 crore will be infused into 20 public sector banks (PSB), excluding only one PSU bank, the Indian Bank. These banks account for more than 80 per cent of NPAs ailing the Indian banking system. This capital infusion will help PSBs meet Basel III capital regulations. The government has specifically asked the banks to use much of the recap funds for lending to the SME sector. This push for more lending to SMEs, in the absence of proper due diligence, may trigger new NPAs.

The government will raise the funds required for the programme by issuing non-tradeable recapitalisation bond and allocate an additional Rs. 8,140 crore from its Budget. The bonds will not have Statutory Liquidity Ratio (SLR) and a tenure of 10 to 15 years.

Riders include focusing on the core strength of the individual banks and restricting them from entering into segments that they are not competent in. The government has asked the banks to identify and monetize their non-core assets and minimize exposure to big corporate loans. Bank will now have to be more careful about consortium borrower and all loans above Rs 250 crore will need special monitoring. The government has also directed the bank to share information about breach of any loan covenant and alert the entire lending consortium.

Meanwhile, the PSB banks traded mostly in the red on Thursday. Indian Bank, Syndicate Bank and Punjab National Bank were down more than 5 per cent, whereas Andhra Bank, Canara Bank, Bank of Baroda, SBI and Union Bank were down by 3 to 4 per cent.