Despite recapitalisation, banks may remain in PCA

The recapitalisation will be equivalent to 1.5 per cent of the risk weighted assets (RWA) of the banks.

By: ENS Economic Bureau | Mumbai | Published: January 25, 2018 1:18:52 am
public sector banks, psb, capital infusion, npa, loans, rbi, recapitalisation, bad debt, Banks NPA, india news, banking news, indian express The recapitalisation package will also create Rs 5,00,000 crore of incremental lending capacity.

Public sector banks, which received Rs 88,139 crore under the government’s recapitalisation programme on Wednesday, are unlikely to come out of Prompt Corrective Action (PCA) framework of the Reserve Bank of India in the near future. The recapitalisation package will also create Rs 5,00,000 crore of incremental lending capacity, which can catalyse the revival of the capital investment cycle in India, banks and rating agencies said.

With 11 out of 21 PSU banks under PCA framework specified by the RBI because of their high NPA levels as well as consecutive years of losses, the recapitalisation will enable banks to reduce the net NPAs as well as improve capital ratios. However, as many PSBs are likely to continue reporting losses during FY2018 due to elevated provisioning levels, they are likely to remain under PCA based on FY2018 financials, till they return back to path of profitability.

RP Marathe, MD& CEO, Bank of Maharashtra, said, “The bank is confident of a steady recovery. The fresh capital with government’s support and fund raising through QIP will help in strengthening our balance sheet and give a boost to our core operations. We have developed a business revival plan to improve the asset quality and efficiency. We are on track towards achieving this goal. We are confident of steering the bank towards profitability in the next three years. The bank will continue to focus on the retail business and SME as the bank has built significant operational expertise in these segments.”

Karthik Srinivasan, group head, Financial Sector Ratings, ICRA said, “We welcome the government’s decision to infuse capital into PSU banks and reiterating its commitment to support all the PSU banks to meet regulatory capital ratios. We expect the capital infusion plans to be sufficient for most of the PSU banks to meet the regulatory capital ratios under Basel III regulations.”

According to Indian Overseas Bank, the capital infusion by the government will facilitate the bank to meet regulatory requirements and provide fair headroom for growing credit in our niche areas. “Banks will fulfill their commitment of responsible banking by deepening financial inclusion and focused MSME growth. It also reaffirms the trust in PSU banks and support by the sovereign state,” IOB said.

Among the non-PCA banks, SBI, PNB, BOB, Canara Bank and Union Bank will be the major recipients of recap funds. Among the PCA banks, IDBI Bank, Bank of India, UCO Bank, Central Bank and IOB will be the major recipients. The government has also given a tacit assurance that not a single state run bank would be allowed to fail. As part of the recap deal banks will also have to identify non-core areas for hiving off, as well as overseas branches to be shut down.

While the government has allocated Rs 88,139 crore for bank recapitalisation (predominantly through recap bonds), Rs 52,311 crore will be allocated to 11 PSU banks that are currently under Prompt Corrective Action.

As per ICRA’s estimates, the current capital allocation is based on the capital ratios and the NPA levels of individual banks and ability of these banks to absorb credit losses from their operations. Certain banks have received much higher capital in relation to the March 31, 2018, regulatory requirements, which possibly reflects the likelihood of much higher credit provisioning these banks will require on their NPAs during the H2FY2018. While the current capital allocation is higher for weaker banks, the next round of recapitaliasiton (Rs 64,861 crore in FY2019) could be based on the performance of the banks, with stronger banks receiving higher share of capital.

The recapitalisation will be equivalent to 1.5 per cent of the risk weighted assets (RWA) of the banks. However the capital ratios are unlikely to improve by an equivalent amount as a portion of this capital will be offset against the losses because of elevated credit provisions that the banks will be required to make during the second half of fiscal 2018. “Adjusting for the losses, we expect CET ratio for banks to improve by 1 per cent by the proposed recapitalisation,” ICRA said.

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