Capital infusion into PSBs unlikely in FY23, a first in 15 years

For the first time since FY08, the government is unlikely to infuse capital into state-run banks this fiscal, according to official and banking sources.

As it holds consultations to entertain supplementary demands, the finance ministry may not allocate capital for PSBs as part of the revised estimates for FY23. This is because public-sector banks (PSBs) recorded good profitability in FY22 and in the first quarter of this fiscal, and their bad loan ratio showed steady improvement.

In the Budget for FY23, the government hasn’t earmarked any outlay for recapitalisation. However, it can always allocate capital for PSBs later in the fiscal by approving supplementary demands, if there is a pressing demand.

For instance, it had to approve Rs 20,000 crore in the revised estimate for FY21 to help PSBs shore up their capital base, even though it hadn’t budgetted anything initially. In FY22, the government trimmed the infusion requirement to Rs 15,000 crore in the revised estimate from the budgetted Rs 20,000 crore. Recapitalisation in recent years has been through bonds.

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“PSBs’ capital adequacy remains sound this fiscal. No PSB is under the prompt corrective action regime anymore. Also, given their improved financials, they are in a position to raise capital from the markets themselves. So, there are very remote chances of recapitalisation (this fiscal),” an official source said. Of course, the results of various PSBs in the second and third quarter of this fiscal will be closely watched by the government, he added.

The government was forced to infuse as much as Rs 3.3 trillion between FY16 and FY21 into state-run banks to help them cope with the bad loan crisis. With the improvement in their balance sheets, the banks are in a position to scale up advances and support the growing credit appetite of a recuperating economy.

At an aggregate level, the capital to risk-weighted assets of state-run banks stood at 14.6% as of March 2022, against the requirement of 10.875%.

Non-food bank credit grew 16% in August, compared with 6.7% a year before. However, loans to industry grew at a slower pace of 11.4% even on a favourable base (it had risen just 1.5% in August 2021).

Importantly, all the 12 PSBs recorded a cumulative profit of Rs 15,306 crore in the June quarter, up over 9.2% from a year before, despite worse-than-expected performance by top two lenders–State Bank of India and Punjab National Bank. In FY22, they more than doubled their profits to Rs 66,539 crore from Rs 31,816 crore in the previous year.

At the same time, state-run banks’ gross bad loans dropped to 7.6% of gross advances by March 2022, a six-year low and compared with 9.4% a year before.

Improved financials had enabled PSBs to take advantage of excess liquidity in the system and raise a record 58,697 crore from the markets in FY21, which included an equity capital of 10,543 crore. This was way above 29,573 crore raised by them in FY20.