Fitch Ratings has said most of the fresh capital under the government’s recapitalisation programme will be given to large banks while banks facing the Reserve Bank of India’s (RBI) prompt corrective action (PCA) framework will get only the minimum capital required under the minimum regulatory requirement.
“We expect most of the fresh capital to be provided to large banks that have scope to grow. The injections could allow some of these banks to pursue stronger expansion, particularly if the improvement in their financial profiles helps them independently tap equity capital markets,” Fitch said in a report. Punjab National Bank has raised Rs 5,000 crore through equity issuance since the recapitalisation plan was announced and other banks, such as Bank of Baroda and Canara Bank, are reportedly looking to follow suit, it said.
“The government appears set to prioritise lending growth when allocating capital. This is likely to mean that banks currently in the RBI’s prompt corrective action framework will receive no more than the capital necessary to ensure they do not breach minimum regulatory capital requirements,” Fitch said. The PCA framework allows the central bank to take a more interventionist approach — often through restricting asset growth. Eleven of India’s 21 state banks, including most small- and mid-sized banks, are in PCA.
The recent decision by Indian Overseas Bank (IOB) to set off operational losses against share premium reserves — part of its capital reserves — instead of revenue reserves illustrates the difficulties faced by some undercapitalised banks as they try to avoid skipping coupon payments on loss-absorbing instruments, it said. Fitch estimated that IOB would not have met the pre-requisite of positive distributable reserves for paying its coupon due in February 2018 if it had not dipped into capital reserves.
The IOB move is not unprecedented, but would have required RBI approval, it said. Only two other banks in serious financial distress have been allowed to take this option in the last two decades. IOB may set a precedent for other weak banks to clean up their balance sheets in the same way.