The government on Tuesday allocated ~22,915 crore to recapitalise 13 public sector banks (PSBs), including the biggest lender State Bank of India (SBI). The sum, which is 92 per cent of the budgeted provision of ~25,000 crore, is aimed at supporting lending operations of these banks and helping them mop up money from markets.
The highest sum of ~7,575 crore will be released for SBI, followed by ~3,101 crore for Indian Overseas Bank and ~2,816 crore for Punjab National Bank, a government statement said on Tuesday.
However, going forward the government may look at additional capital infusion, over the ~25,000 crore budgetary allocation for FY17.
“This is not the end of capital infusion by the government for the financial year. During the course of the year, additional capital requirement by state-run banks will be looked into,” said a senior government official.
The yardstick for allocation was capital requirements of the banks, based on compounded annual growth rate (CAGR) for the past five years, banks’ own projections of credit growth and an objective assessment of the potential for growth of each public-sector bank.
The country’s state owned-banks, reeling from record level of non-performing assets (NPAs), require additional capital to not only meet capital adequacy standards but also to gear up for Basel-III capitalisation norms, which kick in from 2018.
Of the ~1.8 lakh crore capital requirement for Basel-III norms, the government through Indradhanush has promised ~70,000 crore over a four-year period till 2018-19 and asked banks to raise ~1.1 lakh crore from the markets.
Following the above exercise, 75 per cent of ~22,915 crore, that is ~17,186.25 core, is being released now to provide liquidity support for lending operations and to enable banks to raise funds from the market, the statement added.
The remainder – ~5,728.75 crore – 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 allocation of ~22,915 crore will be made against the shares issued by these banks to the government. The sum will be released as and when banks come forward with the shares allotment,” said a senior government official.
The infusion will boost government’s shareholdings in banks, which have been under-capitalised, compared to their private peers. The banks have already taken permission to raise capital themselves but are yet to tap into markets, on account of subdued economic conditions.
The average Capital Adequacy Ratio (CAR) – or the ratio of a bank’s capital to its risk – for PSBs stood at 11.6 per cent as on March 31, lower than 13.2 per cent for banking system as a whole. Basel-III regulations provide for bank to have a minimum capital ratio of nine per cent, in addition to a capital conservation buffer, which would be in the form of common equity at 2.5 per cent of the risk weighted assets. In other words, banks’ minimum CAR must be 11.5 per cent, which is higher than the 9.62 per cent banks are required to currently maintain.
However, the pattern of recapitalisation showed that not all banks that received a disproportionately higher share of the capital were stellar performers. Banks such as Indian Overseas Bank, which did not receive any capital support from the government in February 2015, when it infused ~7,000 crore in six banks, have been given capital of ~3,100 crore. Similarly, UCO Bank has received ~1,000 crore.
At the end of FY16, the gross bad debt ratio of Indian Overseas Bank was at 17.40 per cent, while UCO Bank’s gross NPA ratio stood at 15.43 per cent.
This led analysts to surmise that capital infusion is perhaps to protect the banks, as the government is committed to standing behind its banks at the time of distress.
“The nature of capital infusion shows that it is a kind of bailout offering and not necessarily trying to aid the banks in growth,” said Abhishek Bhattacharya, director (financial institutions), at India Ratings, the domestic arm of Fitch Ratings.
“The weak banks have got enough capital to help them cover some of their NPA-related stress. Still, our base case remains that the lack of capital would limit PSB growth at nine per cent CAGR over FY16-FY19, the slowest in last two decades,” said Bhattacharya.
Bankers welcomed the infusion. “The provision of bank capital is most welcome and is very timely. We are hopeful that such provision of capital will help banks in increasing lending, raising additional funding and cleaning up their balance sheets,” said State Bank of India Chairman Arundhati Bhattacharya in a statement.
G Padmanabhan, non-executive chairman of Bank of India, said getting capital in the second quarter itself will give greater freedom to plan for business, in the year. It is better than getting capital at the end of the financial year.
Bank of India is looking at low double-digit growth in credit during FY17, against shrinkage seen in FY16, he said. The Mumbai-based lender is receiving ~1,784 crore as equity infusion from the government.
Dena Bank Chairman and Managing Director Ashwani Kumar, who is also the chairman of the Indian Banks’ Association, said the capital infusion gives the bank room to plan for growth in Fy17. Mumbai-based public sector lender is targeting about 10 per cent growth in loan book.
K Venkata Rama Moorthy, executive director, United Bank of India, said the bank was working on thin capital base, which constrained growth. Now the bank would be in a better position to plan for up to 10 per cent growth in 2016-17.
It also creates room for raising additional Tier-I and Tier-II capital, PSB executives said.
Bank of Baroda and IDBI Bank did not get any allocation, as they had told the government they did not have any need for capital infusion.
Greater provisioning requirement for NPAs on account of Reserve Bank of India-mandated asset quality restructuring severely hit earnings of PSBs in the third and the fourth quarters of 2015-16. They posted about ~20,000 crore losses in the fourth quarter of 2015-16 alone.
The gross bad loans of public-sector lenders increased to 9.3 per cent of gross advances as of March 2016, from 5.4 per cent a year ago. Bad loans of these banks rose by about 80 per cent year-on-year to ~4.76 lakh crore in 2015-16, from ~2.67 lakh crore.
In the previous financial year, ~25,000 crore was provided via three tranches, where 40 per cent of the amount was given to those banks that were in need of support. The government will infuse ~10,000 crore each in FY18 and FY19.
The state-run lenders have been pitching for higher recapitalisation over the budgeted amount to meet their capital adequacy requirements. Finance Minister Arun Jaitley has repeatedly said that if banks require additional recapitalisation, it will be provided.
In line with the announcements made under Indradhanush and the Budget, the government undertook an exercise to assess the capitalisation needs of PSBs for 2016-17.
Jaitley had said the government might release higher sum than provided in the Budget, if resources permit.
“The capitalisation by the government will provide necessary confidence to PSBs, even though the absolute capital requirements are higher,” said Sapan Gupta, partner, national practice head (banking & finance) at Shardul Amarchand Mangaldas & Co.
Consolidation process within the PSBs has already begun with SBI looking to merge its five associate banks as well as the newly-created Bharatiya Mahila Bank with itself.
The country’s largest lender has five associate banks — State Bank of Bikaner and Jaipur, State Bank of Travancore, State Bank of Patiala, State Bank of Mysore and State Bank of Hyderabad.
Of these, State Bank of Bikaner and Jaipur, State Bank of Mysore and State Bank of Travancore are listed.