The Centre is unlikely to provide additional capital to public sector banks (PSBs) in the current fiscal, over and above R25,000 crore committed in the Budget, as officials feel lack of substantial progress on performance improvement parameters and a tight budget don’t warrant extra allocation. The move comes at a time when analysts say that the committed government capital is hardly enough to address the non-performing asset (NPA) mess and accelerate credit growth, which was negative in June quarter.
In a recent report, rating agency Standard & Poor’s estimated that PSBs need $45 billion capital infusion by FY19. Against this, the Centre had announced a R70,000-crore (roughly $11 billion) capital infusion plan for these banks spread over four years. As per the plan, it infused R25,000 crore in PSBs in FY16 and has budgeted a similar amount for FY17 as well.
Following criticism that the budgeted capitalisation was not enough, the finance ministry had assured that it would provide another R5,000 crore in FY17, if required. Sources told FE that this additional outlay was unlikely.
A sharp decline in profitability and mounting losses could wipe out the revenue reserves of some PSBs this fiscal and hamper their near-term ability to service coupon on additional tier 1 (AT1) bonds issued under Basel III capital regulations. As many as 13 of the 21 PSBs (taking State Bank of India and its associates as a consolidated entity) reported losses in FY16. Half of these 13 banks could make losses this fiscal as well, Crisil has noted. “As on date, 14 PSBs have R22,600 crore of AT1 bonds outstanding. While the government of India has committed capital support to PSBs to sustain their capital ratios above regulatory minimum, the coupon on AT1 bonds can only be serviced through current year’s profit or from revenue reserves and hence any capital infusion by government alone cannot improve the bank’s ability to service coupon on these bonds,” Crisil said.
In July this year, the government announced announced R22,915 crore capital infusion in 13 PSBs including State Bank of India and Punjab National Bank. However, it said 75%of that amount (about R17,186 crore) will be released immediately to the banks to provide liquidity support for lending operations as also to enable banks to raise funds from the market. The remaining R5,729 crore was to be released later based on performance, with particular reference to greater efficiency, growth of both credit and deposits and reduction in the cost of operations.
The June quarter witnessed a marginal decline in risk weighted assets (RWAs) of PSBs by 0.02%. At the same time, credit growth has declined 2.56%. Eight PSBs including State Bank of India, Central Bank of India, Corporation Bank, Bank of Baroda, Syndicate Bank, Punjab & Sind Bank, and United Bank of India have posted a negative credit growth rate and simultaneously an increase in RWAs during the quarter.
“Not many PSBs have shown significant improvement in performance parameters. So we expect substantial savings from R5,729 crore capital infusion linked to performance criteria,” an official said. Savings and R3,075 crore unallocated budget (out of R25,000 crore) is likely to make available about R7,000-8,000 crore at the disposal of the government to infuse capital to very needy banks during the course of the year to meet capital adequacy norms, the official said.
Separately, even though PSBs were told to mobilise about R1.1 lakh crore additional capital from markets during FY16-FY19, analysts doubt the ability of the banks to raise capital at this juncture due to dip in their valuations.
Poor asset quality and weak capitalisation restrict the lending capacity of PSBs, thereby contributing to slower pace of economic revival in the country, analysts have said. The stressed assets (gross NPA and restructured loans) of public sector banks rose from R7.46 lakh crore (14.62% of gross advances) as on March 2016 to R7.83 lakh crore (15.74%) as on June 2016.
S&P said: “The government may have to increase the allocation if the banks are not able to secure capital from alternative sources, such as equity markets, additional tier-1 bonds, and insurance companies.” The rating agency has included this assessment when it retained India’s sovereign rating at “BBB-”, the lowest investment grade, citing weak public finances.
The government’s hands are also tied this year due to shortfall of R32,000 crore in spectrum auction revenue and very weak chances of achieving R20,500 crore in strategic sales of PSUs. As it could barely make up the shortfalls by tax revenue buoyancy (due to income disclosure scheme as well as higher taxes on petrol and diesel), it won’t have room to allocate more funds to banks this year, another official said.