A street side vendor wait for customers at a stall outside a Bank of India (BOI) branch in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

India To Announce Additional Fund Infusion Into PSU Banks

Economic Affairs Secretary Subhash Chandra Garg said the government will announce a new recapitalisation plan for public sector banks tomorrow.

His statement came after Bloomberg reported quoting an anonymous government official that the government would infuse an additional Rs 40,000 crore in capital-starved state-owned lenders that are saddled with bad loans.

The recapitalisation will be funded via bonds in fiscal year 2019, according to the Bloomberg report. Most state-run banks—except State Bank of India, Punjab National Bank, Bank of Baroda and Indian Bank—will get additional infusion. The second supplementary demand for grants may be tabled in the Parliament Thursday.

The official, who did not wish to be identified citing rules, said lenders including Allahabad Bank and Bank of India will soon exit the Reserve Bank of India’s so-called prompt corrective action framework that restricts them from expanding business.

The fresh infusion plan comes as public sector lenders, which contribute more than 60 percent to total loans extended by Indian banks, are starved for capital, with nearly half of them under the RBI’s prompt corrective action framework—that places restrictions on banks with weak financial and operational metrics. The infusion will be over and above the Rs 2.11 lakh crore announced in October 2017. The government planned to infuse Rs 1.35 lakh crore through recapitalisation of bonds and the rest through budgetary allocations. In financial year 2017-18, the government infused Rs 88,139 crore in state-owned banks.

Shares of state-owned banks rose after the report. The NSE Nifty PSU Bank Index closed 2.9 percent higher, making it the best performing sectoral gauge.

India To Announce Additional Fund Infusion Into PSU Banks

“Bulk of the capital infusion by the government in the last financial year has been used up in absorbing losses from bad loans. Any additional amount for bank recapitalisation will be positive for the banking sector as it will help a lot of the weaker banks meet the regulatory minimum capital adequacy ratios,” Saswata Guha, director, Fitch Ratings, said, adding that the agency was not aware of the exact amount of recapitalisation proposed. “However, we do not think this additional capital will be enough for substantial loan growth.”

As far as banks coming out of PCA, Guha said any action indicating that there is a dilution in the framework would be a credit negative since banks under the framework are structurally very weak.

As many as 11 public sector banks are under PCA and face lending restrictions. Of these, Dena Bank has already been slotted for a merger with Bank of Baroda and Vijaya Bank, while IDBI Bank is set to be taken over by Life Insurance Corporation of India.