The Reserve Bank of India has raised concern over the falling capital adequacy ratio (CRAR) of public sector banks.
The CRAR for PSBs fell to 11.24% as on March 31, 2015, from 11.4% in the year-ago period.
During a recent speech, RBI deputy governor SS Mundra said that although the banking system was adequately capitalised, challenges were on the horizon for some lenders. “For the system as a whole, the CRAR has been steadily declining and, as at the end of March 2015, it stood at 12.70% against 13.01% a year ago,” Mundra said.
He added: “Our concerns are larger in respect of the PSBs where the CRAR has declined further to 11.24% from 11.40% over the last year.”
Mundra said concerns raised about the ability of banks to raise additional capital were not entirely misplaced, especially for PSBs.
A higher level of capital adequacy is needed due to higher provisioning requirements, resulting from deterioration in asset quality, kicking in of the Basel-III norms and also to sustain and meet the impending growth in credit demand.
According to Mundra, the poor valuations of bank stocks, especially the PSBs, is not helping matters either, as raising equity has become difficult. “When even the best performing PSBs have been hesitant to tap the markets for augmenting their capital levels, it would be difficult for the weaker ones to raise resources from the market. A singular emphasis on profitability ratios (based on RoA and RoE) perhaps fails to capture other aspects of performance of banks and could perhaps encourage a short-term profitability-oriented view by bank management.”
However, with a recapitalisation budget of only Rs 7,940 crore in FY16, smaller public sector banks are likely to miss out if the finance ministry retains its criteria for allocation based on return on assets (RoA) and return on equity (RoE). Data compiled by Capitaline show that among PSBs, United Bank had the lowest return on equity at -29.1% in FY14, followed by Central Bank at -8.57% and Indian Overseas Bank (IOB) at 4.51%. Bank of Maharashtra had an RoE of 6.4% and Corporation Bank’s RoE was 5.7%.
In February, the government announced its plans to recapitalise nine public sector banks based on their last three years’ weighted average RoA and RoE. Under the new criteria, only nine banks – State Bank of India, Bank of Baroda, Punjab National Bank, Canara Bank, Syndicate Bank, Allahabad Bank, Indian Bank, Dena Bank and Andhra Bank – were selected for a Rs 6,900-crore capital infusion in FY15. The chunk of it — Rs 2,970 crore — was allocated to SBI, followed by BoB at Rs 1,260 crore and PNB at Rs 870 crore.
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