The government on Friday announced an upfront infusion of Rs 55,250 crore in state-run banks to boost credit growth and regulatory compliance of the merging lenders.

“The Rs 55,250-crore upfront capital infusion will be made in PSU banks for credit growth and regulatory compliance to support the economy. We have to bolster equity infusion into the banks with complete good governance footing,” finance minister Nirmala Sitharaman said.

The minister had last Friday announced an upfront capital infusion of Rs 70,000 crore in state-run banks.

Banks to get a cash prop include Punjab National Bank, Union Bank, Canara Bank, Indian Overseas Bank, Central Bank and Bank of Baroda.

The finance ministry had infused Rs 1.06 lakh crore as bank recapitalisation in the previous fiscal against the budgeted target of Rs 65,000 crore.

“No capital infusion has been announced for the SBI. According to estimates, SBI will require Rs 15,000 crore tier-1 capital during FY2020 for growth. In such a scenario, ability of the SBI to raise capital through divestments or from the market will remain to be seen,” said Anil Gupta, vice-president, sector head (financial sector ratings), Icra.

The government has also outlined the road map to strengthen corporate governance at public sector banks.

Sitharaman said banks will now be allowed to recruit chief risk officers at market-linked compensation. The bank boards can also decide a system of individual development plans for all senior executive positions.

The board committee of PSBs can appraise the performance of the general manager and above ranking officers. The risk committee also has been given the right to veto the decisions of the senior management.

Prakash Agarwal, Head- Financial Institution, India Ratings and Research (Fitch Group) said, “it is possible that the current mergers may face more friction than the last one with BoB, Dena and Vijaya. In that case, a large, well-capitalised strong bank absorbed two much smaller entities. In the present case, the mergers are mostly among larger banks, with absorbing bank not necessarily in strong health. However, given the merged banks are on similar technology platform, the integration should be smoother. Also it is likely that management attention and bandwidth of the entities being merged could get split impacting the loan growth and reduce focus on strengthening asset quality in the short term. “

He said “the amalgamation will require harmonisation of asset quality and provisioning levels among the merging banks and may spike up the credit provisions this year as was seen in recent merger of Bank of Baroda. However given the sizeable capital infusion being announced for amalgamating banks, the merger is unlikely to credit negative for merging banks.”

To strengthen the board committee system, the finance minister said that flexibility will be given to boards of large PSBs to enhance sitting fees of Non-Official Directors (NODs). These boards will also be given the mandate to reduce/rationalise board committees.

Appointing a risk officer who can be selected from the private sector with market based compensation is important because if public sector banks have to link their lending rates with market rates, then it is very important to hedge that risk. One will have to see if the board strengthening is observed in spirit as well.

Sitharaman also said that loan recovery of PSU banks was at record levels as Rs. 1.21 lakh crore was recovered by the banking system.

The Finance Minister said that for Non-Banking Financial Companies (NBFCs), a partial guarantee scheme has already been executed and four NBFCs have already found liquidity solution via PSBs in the last one week.