The government Thursday announced fund infusion of Rs 83,000 crore in public sector banks by March-end as it sought to increase its capital commitment to partly make up for the lenders’ shortfall in fund raising from markets.
With the Finance Ministry formally seeking Parliament’s approval for infusion of an additional Rs 41,000 crore in the state-owned banks through the second batch of Supplementary Demands for Grants, the stage is set for some banks to come out of the Reserve Bank of India’s Prompt Corrective Action (PCA) framework and thereby start lending, which will eventually support overall growth.
The fresh dose of capital will be given to enable banks to meet regulatory norms, allow better-performing PCA banks to achieve 9 per cent capital adequacy ratio, strengthen merging banks such as the recently merged Bank of Baroda-Vijaya Bank-Dena Bank combine and prevent non-PCA banks, such as Punjab National Bank, that are on the borderline from coming into the framework. The dose of extra capital from the government will also help banks get better valuations when they go to the market to raise funds.
As against planned capital infusion of Rs 65,000 crore in the current financial year, public sector bank will get a total of Rs 1.06 lakh crore, Finance Minister Arun Jaitley said at a press conference. Of Rs 1.06 lakh crore, the government has already given Rs 23,000 crore so far this fiscal to various banks. While the additional government capital infusion likely remains within the overall Rs 2.11 lakh-crore package announced last year, it may enable banks to raise more funds from the markets going forward.
“…last quarter has already shown that there is an improved performance and the downward slide in the NPAs itself would now commence. This entire (recapitalisation) exercise would also lead to improvement in the lending capacity of the banks itself,” Jaitley said.
This will absorb impact of stressed assets
Infusion of extra funds will hasten the process of pulling certain banks out of the Prompt Corrective Action framework, as it will improve capital adequacy ratio of better-performing PCA banks. The government has had to increase funding support since public sector banks were unable to raise enough funds from the equity markets due to various reasons. This decision enables these banks to step up lending in the economy and absorb some of the collateral impact of stressed assets. Eventually, it will contribute to overall growth of the economy.
Last October, the government had announced plans to inject Rs 2.11 lakh crore of equity in PSU banks — comprising Rs 1.35 lakh crore through recapitalisation bonds, Rs 18,000 crore from budgetary resources and Rs 58,000 crore to be raised by the banks from the market. While government has stepped up capital infusion, banks could only raise Rs 24,000 crore from market out of the planned Rs 58,000 crore.
Sources said extra capital from the government will put banks on a stronger footing, helping them get better valuations when they go to the market to raise funds. State Bank of India and Allahabad Bank will be among the first to raise funds from the market. Stronger banks like SBI, Bank of Baroda and Indian Bank may not get extra capital, while Punjab National Bank, which is at risk of falling below the risk thresholds set under the PCA framework, may be considered for more capital infusion.
Among the banks that may come out of the PCA include Bank of Maharashtra, Oriental Bank of Commerce, Corporation Bank and Dena Bank, banking analysts said. The additional equity infusion will likely be funded through recapitalisation bonds, which will not put pressure on the Centre’s fiscal deficit even though it may have to account for interest on these bonds in its books.
Public sector banks have shown sharp improvement on various parameters compared to their performance in March 2015, when asset quality review started, Department of Financial Services Secretary Rajeev Kumar said. “PSBs are showing tremendous improvement in terms of recognition, provisioning, recovery and reforms. And therefore, this is the time that we empower with capital, so that the fastest growing economy is fully geared to support that growth,” he said.
The provision coverage ratio of state-owned banks, he said, has risen steeply from 46.04% as of March 2015 to 66.85% as of September 2018, giving banks cushion to absorb losses. He said the gross NPAs of PSBs have started declining after peaking in March 2018, registering a decline of Rs 23,860 crore in the first half of the current financial year, even as their recoveries picked up sharply. Loans which are due for 30-90 days and face an immediate risk of turning into NPAs, fell to Rs 87,000 crore in the September 2018 quarter, from Rs 2.25 lakh crore in September 2017 quarter, he said.
Non-NPA accounts overdue by 31 to 90 days (Special Mention Accounts 1 & 2) of PSBs have declined by 61% over five successive quarters from Rs 2.25 lakh crore as of June 2017 to Rs 0.87 lakh crore as of September 2018, substantially paring down credit at risk. Cash recovery banks have more than doubled to Rs 60,726 crore in the first half of the current financial year, as compared to Rs 29,302 crore during the same period last fiscal.
The Secretary said the actual fund infusion will be based on assessment of banks’ performance and needs. The government’s commitment to strengthen the regulatory capital of banks, as well as focus on improving financial ratios, is likely weigh on the RBI’s decision to pull certain banks out of the PCA. A RBI committee is currently reviewing the performance of PCA banks to examine whether certain banks can be pulled out of the PCA framework.
“Today’s proposal is an expression of government’s commitment that each PSB is an article of faith, and aims at securing compliance even for the higher regulatory norms,” the Finance Ministry said in a statement.
Kajal Gandhi, banking analyst with ICICI Securities, said: “It is not yet clear if the recapitalisation bond component is over an above the capitalisation plan of Rs 2.1 trillion. However, as banks have been only able to raise a part of the Rs 58,000 crore that they were supposed to raise from the market, the government may have substituted the balance of that amount with the recapitalisation bond.”