PSU Banks: Government Commits Additional Funds For Bank Recapitalisation
People walk outside the North Block which houses India’s Finance Ministry. (Photograph: Prashanth Vishwanathan/Bloomberg)

PSU Banks: Government Commits Additional Funds For Bank Recapitalisation

The government will increase the amount of funds it has committed to recapitalise public sector banks in the current financial year, as it tries to expedite a now three-year old clean-up of government owned lenders.

The Department of Financial Services is seeking to increase the bank recapitalisation amount by Rs 41,000 crore, showed the Supplementary Demand For Grants filed by the Government on Thursday.

The increased recapitalisation plan was part of the additional spending of Rs 85,949 crore outlined in the Supplementary Demand for grants. However, since the recapitalisation will come via bonds, the additional net cash outgo will be limited to Rs 15,065.49 crore for the current year.

The fresh fund infusion plan comes as public sector lenders remain starved for capital, despite significant support from the government over the last four years.

In 2015, the government had announced a recapitalisation plan of Rs 70,000 crore. By 2017, it became clear that government banks needed much more capital support due to a surge in bad loans following an asset quality review conducted by the Reserve Bank of India. At the time, a Rs 2.11 lakh crore package was announced, which included Rs 18,000 crore left over from the 2015 recapitalisation package. As part of the Rs 2.11 lakh crore, banks were asked to raise Rs 58,000 crore from the markets. However, these lenders have raised only about Rs 24,000 crore from the markets. This shortfall will be made up with the help of the additional government capital.

All taken together, the government has infused over Rs 2.5 lakh crore into public sector banks since 2015.

Who Gets The Capital?

The additional amount sanctioned for recapitalisation will mean that Rs 83,000 crore will be infused into PSU banks over the next three months, said Finance Minister Arun Jaitley at a briefing on Thursday. The fund infusion will fall into four categories:

  • Banks that need to meet minimum regulatory capital norms.
  • Better performing banks under Prompt Corrective Action (PCA) will be given capital to meet 9 percent CRAR norm and 6 percent Net NPA requirement to help them come out of PCA.
  • Non-PCA banks which are close to red line to ensure they don't fall into PCA.
  • Regulatory capital for banks undergoing amalgamation.

The need for additional funding had become apparent as weak public sector banks continued to operate with capital ratios close to the regulatory minimum. Some like Allahabad Bank and IDBI Bank have received emergency capital as their capital fell below the prescribed level. Under the Basel-III rules, the minimum total capital is set at 9 percent, while the minimum core equity Tier-1 ratio is set at 5.5 percent.

With additional capital being provided by the government and some gains likely from the recent bond yields, some of the weaker banks may be able to exit from the RBI’s prompt corrective action framework.

Three or four banks could exit the PCA framework with the additional support, said Rajeev Kumar, secretary in the Government’s Department Of Financial Services. Stronger banks like State Bank of India, Indian Bank and Bank of Baroda may not need additional government support. On the flip side, Punjab National Bank, which is at risk of falling below the risk thresholds set under the PCA framework, will be eligible to be consider for more capital infusion, said Kumar.

As per our assessment, the additional capital infusion may be skewed towards a few banks which the government wants to see released from the PCA framework.
Anil Gupta, Head - Financial Sector Ratings, ICRA

Signs Of Improvement

The bad loan clean-up has now been underway for more than three years. Over this period, bad loan ratios and provisioning requirements have surged for state-owned lenders. This, in turn, forced the government to shell out an unprecedented amount of funds for bank recapitalisation.

The government is now hopeful that early signs of recovery are starting to emerge.

In a presentation made on Thursday, the government said that the provision coverage ratio of banks has improved substantially, suggesting that bank balance sheets are stronger now.

The increased provisioning has meant that net NPA ratios of banks are starting to improve. A slowdown in fresh slippages, or new loans turning bad, has also helped banks cap their bad loan ratios.

Data provided by the government shows that loans overdue by 30-90 days, which are at immediate risk of turning into NPAs, have also declined from Rs 2.25 lakh crore in the September 2017 quarter to Rs 87,000 crore in the September 2018 quarter.

While the progress in resolving large stressed assets using the Insolvency and Bankruptcy Code has been slow, cash recoveries have picked up compared to last year, the government showed in its presentation.

Some analysts feel that the recapitalisation funds may still prove to be inadequate.

“The additional Rs 41,000 crore would be enough to make banks meet their regulatory requirements, but considering the potential for growth and more provisioning that will have to be made in future, this amount would not be enough,” said Saswata Guha, director at Fitch Ratings.

The rating agency estimates that public sector banks will need $32 billion (~ Rs 2.24 lakh crore) over the next few years to meet regulatory requirements, provisioning needs and growth capital.

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