NEW DELHI: The government has provided Rs 22,915 crore of capital to 13 state-run banks, infusing funds early in the fiscal year as it looks to boost lending and shore up economic growth.
The biggest beneficiary of the capital allocation is State Bank of India, the country’s largest lender, which gets nearly a third of the total,Rs 7,575 crore. Indian Overseas Bank comes next at Rs 3,101crore.
The move will provide liquidity support for lending operations and also enable banks to raise funds from the market, the finance ministry said in a statement on Tuesday. Lenders hailed the move but were cautious about whether it will help increase credit offtake or bring down interest rates.
Credit growth remained muted at 8 per cent in May compared with 8.5 per cent in the year earlier. Loan growth has failed to perk up as private investment remains a laggard in India‘s economic revival story, which is held aloft largely by consumption and government spending. And, although RBI has lowered interest rates by 150 bps since January 2015 to 6.5 per cent, transmission of policy appears to have stalled.
Banks have defended themselves by saying they’re constrained by low savings rates and lack of liquidity. Investors didn’t react much to the capital infusion — National Stock Exchange’s PSU bank index rose a marginal 0.26 per cent.
However, Canara Bank, which receivedRs 997 crore, rose 6 per cent. The Centre will release 75 per cent of the amount immediately. “The remaining amount, to be released later, is linked to performance, with particular reference to greater efficiency, growth of both credit and deposits and reduction in the cost of operations,” the finance ministry said.
Urgent need for growth capital
SBI Chairman Arundhati Bhattacharya welcomed the infusion and said it was timely.
“We are hopeful that such provision of capital will help the banks in increasing lending, raising additional funding and cleaning up their balance sheets,” she noted in a statement.
Punjab National Bank, Central Bank of India and Bank of India are among the banks that will benefit from the exercise. “We are very happy with the amount allocated,” said Punjab National Bank Managing Director Usha Ananthasubramanian.
“Going forward, capital will not be a constraint for lending but the economic situation will also play an important role in credit offtake.” The government has budgetedRs 25,000 crore for capital infusion in state-run banks this fiscal. But experts are of the view that given the banks’ heavy bad loan burden, the government will need to infuse more capital if it wants state-run lenders to be competitive.
“This amount is not at all sufficient if you look at the regulatory requirements and that the cleaning of balance sheets is still ongoing,” said Naresh Makhijani, partner at advisory firm KPMG.
“In this market, there will be few takers for their (banks’) market offers and they will not be able to raise a similar amount of funds through sale of their non-core assets.” On Monday, Fitch said it is not clear if the Rs 70,000 crore capital promised by government by FY19 will be sufficient.
“Fitch estimates the banking system needs around $90 billion (Rs 6 lakh crore, or 4 per cent of GDP in FY17) of capital, while many public sector banks are likely to find it difficult to access new capital from non-government sources,” it said in a statement.
Gross NPAs of public sector banks at the end of FY16 was 9.32 per cent. According to RBI’s June 28 Financial Stability Report, gross non-performing assets (NPAs) in the banking sector grew to a 12-year high of 7.6 per cent of advances at the end of March.
As per RBI’s projection, the gross NPA ratio may rise further to 8.5 per cent by March 2017.
Asset-quality review hurts results
Banks have been reporting poor earnings as they have been forced to recognise bad loans as part of RBI’s asset-quality review.
A recent report by India Ratings and Research (Ind-Ra) has also pointed out that limited availability of growth capital for public sector banks could pull down their loan growth trajectories to a compound annual growth rate (CAGR) of 9 per cent over FY16-FY19.
The growth will be even slower at 8.1 per cent CAGR for mid-sized staterun banks, the report notes. The finance ministry said the capital infusion exercise for the current year is based on an assessment of need based on various parameters including credit growth for the past five years, banks’ projections and an objective assessment of the potential for expansion of each public sector bank.
A senior finance ministry official said some of the banks that did not find mention in the current list of beneficiaries will also be given capital support, if needed. Notable among those missing is Bank of Baroda. “At present these banks (not on the list) are adequately capitalised and they have plans to raise capital through other routes like public offerings and through bonds.
If they are not able to raise resources we will be allocating some amount at the end of the fiscal,” the official said. IDBI Bank, in which the government plans to lower its stake to below 51 per cent, has also not been allocated any amount.
Finance Minister Arun Jaitley, in his Budget speech in February, had said the government would provide additional capital if required and would find the resources for doing so.
“We stand solidly behind these banks,” he had said. According to finance ministry estimates, state-run banks will require Rs 1.8 lakh crore of additional capital in the next four financial years, of which Rs 1.1 lakh crore will have to be raised from the market and through sale of noncore assets.