With the government firming up capital infusion of Rs 11,336 crore in five state owned banks by next week, shares of the public sector banks jumped by up to 11 per cent on Tuesday. Scam hit Punjab National Bank will likely get the highest chunk of Rs 2,816 crore as capital, sources said. While the BSE PSU index jumped 2.3 per cent by the end of the day, the banking index rose 1.4 per cent. Following gains in banking stocks, the Sensex at the Bombay Stock Exchange rose 0.5 per cent and the mid-cap and the small-cap indices jumped 2.14 per cent and 1.12 per cent, respectively.
Among the public sector banks, Corporation Bank jumped 10.88 per cent followed by Union Bank of India that rose 8.68 per cent. Allahabad Bank, Punjab National Bank and Bank of Baroda rose 7.2 per cent, 6.6 per cent and 6.4 per cent, respectively. Other banks too gained between 3 per cent and 6 per cent. SBI was up 2.98 per cent.
Even private sector banks witnessed gains during the day. While the Federal Bank rose 19.1 per cent, Axis bank and ICICI Bank rose 2.9 per cent and 2.7 per cent, respectively.
The gains for the banking stocks and the broader market followed reports in the second half of the trading session that the government will infuse capital aggregating to Rs 11,336 crore in public sector banks.
The finance ministry has approved infusion of Rs 11,336 crore in five state-owned lenders — Punjab National Bank, Corporation Bank, Andhra Bank, Allahabad Bank and Indian Overseas Bank, government sources said on Tuesday.
Within the capital infusion plan, PNB, which has been impacted by the Nirav Modi scam, is expected to get the highest amount of Rs 2,816 crore. While Corporation Bank is said to get Rs 2,555 crore, Indian Overseas Bank will get Rs 2157 crore. The other two banks Andhra Bank and Allahabad Bank will get Rs 2,019 crore and Rs 1,790 crore respectively, sources said.
This is the first capital infusion in the current fiscal and the remaining amount of Rs 53,664 crore is expected to be disbursed during the course of the year.
These banks have come under pressure because of upcoming interest payment to their holders of Additional Tier 1 (AT-1) bonds and thus they were facing the risk of breaching the regulatory capital requirement. These banks need to make interest payments on AT-1 bonds next week and their reserves are not sufficient to meet these commitments. The government is providing capital first to banks facing acute shortage.
Banks raise capital through AT1 bonds, which are perpetual in nature and provide higher interest rate to investors. A high level of bad loans and widening losses have made it difficult for banks to service these bonds from their own earnings.
The infusion will be a part of the remaining Rs 65,000 crore out of Rs 2.11 lakh crore capital infusion announced by the government for two financial years.
In October 2017, the government had announced Rs 2.11 lakh crore capital infusion programme, under which the public sector banks were to get Rs 1.35 lakh crore through re-capitalisation bonds, and the balance Rs 58,000 crore through raising of capital from the market. The government has already infused Rs 80,000 crore out of the Rs 1.35 lakh crore through recap bonds in the banks and balance would be done during this financial year.
As a result of heavy losses and increasing bad loans, state-owned banks net worth has shrunk and they are working to sell non core assets and improve recoveries to boost their financial health. Meanwhile, Life Insurance Corporation is raising its stake in IDBI Bank to 51 per cent — which will provide the much needed capital support to the bleeding bank. This would also reduce the burden on the Exchequer of capitalising the IDBI Bank.