Little to cheer for PSU banks in July Budget; no govt recapitalisation till December

The new government is not likely to announce bank recapitalisation in the July budget and will wait for the second quarter results to infuse capital into the public sector banks, Finance Ministry officials told Financial Express Online. The previous government has already completed the mega-bank recapitalisation of Rs 2.11 trillion, which it had announced in October 2017. “There is no need to inject capital in banks in the July budget. We expect three to four banks to come out of PCA this year. We will assess the second quarter results of PSBs, and then if required we will recapitalise the banks accordingly by year-end,” a Finance Ministry official told Financial Express Online requesting anonymity.

Currently, there are five banks under Reserve Bank of India’s (RBI) prompt corrective action framework which puts restrictions on big-ticket lending, dividend payouts and branch expansion. With the help of government’s capital, five banks have been able to come out of it and the next five banks may come out of it by the end of this year, the official added.

Further, the government expects banks to raise some money from the recovery of bad loans. “The state-run lenders have recovered more than Rs 1 lakh crore in FY19 through the resolution of bad loans. Further recovery from the resolution of these bad assets will help the banks in raising capital and alleviating their need for government’s capital,” another finance ministry told Financial Express Online.

The government capital helps the banks to maintain tier-I core capital requirements. Under Basel III norms, all the banks are required to meet both risk-based capital minimum Common Equity Tier 1 (CET1) requirement of 4.5 per cent and the target level CET1 requirement of 7 per cent.

In a bid to overcome the problem of rising bad loans in banks and to give further boost to the micro, small and medium enterprises which got adversely impacted during demonetisation, former Finance Minister Arun Jaitley in October 2017 had announced a mega plan of recapitalising PSU banks by Rs 2.11 lakh crore over a period of two years.

The government had earmarked Rs 1.35 lakh crore of the total capital to be allocated through bonds, while the remaining amount of Rs 78,000 crore was through market raising and budgetary support.

In FY2017-18, the government had infused Rs 88,000 crore in PSU banks, including the budgetary support portion and bonds after the announcement of Rs 2.11 trillion bank recapitalisation in October. In FY 2018-19, the government provided the remaining Rs 65,000 crore of the proposed recapitalisation.

However, the banks could not raise their own portion of money via markets, leading to the government providing for an additional Rs 41,000 crore. Its purpose for enhancing capital infusion for the last year was to help the banks under RBI’s prompt corrective action to meet regulatory capital requirements and also help non-PCA banks which were on the verge of falling under PCA.