The capital infusion of public sector banks (PSBs) is a “big bang reform” aimed at supporting credit growth and job creation, says a SBI research report.

The government on October 24 unveiled Rs 2.11 lakh crore two-year road map for strengthening NPA-hit public sector banks, which includes re-capitalisation bonds, budgetary support, and equity dilution.

According to the SBI research report Ecowrap, as PSBs have 70 per cent market share in the banking space, this will help the government to gear-up lending to MUDRA scheme, which has the highest employment opportunities in the country. “Till now Mudra loan has been distributed to around 9.18 crore units and around 80 per cent of these loans have been sanctioned to women entrepreneurs,” the report said.

It further said that Mudra since its inception has generated 1.68 crore incremental jobs and total around 5.5 crore of jobs mostly in industrialised states like Karnataka, Tamil Nadu and Maharashtra.

The capital infusion of PSBs entails mobilisation of capital, with maximum allocation in the current year, to the tune of about Rs 2,11,000 crore over the next two years, through budgetary provisions of Rs 18,139 crore, and recapitalisation bonds to the tune of Rs 1.35 lakh crore.

The report noted that “from the banks’ point of view, subscribing to the Recapitalisation Bonds does not really strain their finances, because lending to the Centre is the safest thing. In any case, PSBs tend to invest well in excess of their SLR requirements in G-secs”.

Recapitalisation of PSBs through widely-discussed recapitalisation bonds has precedence not only in India but also in many other countries like Korea and Malaysia. “The obvious advantages of such bonds are that they do not alter the fiscal maths, as government earned both dividends and market returns on bank shares,” it said.

Moreover, the government need not raise immediate tax revenues and by borrowing directly from the banking system instead of the markets, the Centre can avoid crowding out private borrowings or distorting market yields, the report added.