The government's current proposal is to infuse Rs 25,000 crore each in this fiscal and the next (the PJ Nayak committee had estimated PSBs' capital requirement at Rs 34,000 crore in FY16 and Rs 76,000 crore in FY17) and Rs 10,000 crore each in FY18 and FY19.
Keen to stimulate credit growth, the government on Friday sought Parliament’s approval to infuse Rs 70,000 crore into public sector banks (PSBs) out of budgetary allocations between FY16 and FY19. The move, which was welcomed by Reserve Bank of India governor Raghuram Rajan as a “good beginning”, is intended to enable PSBs to expand and help them tackle the problem of mounting non-performing assets (NPAs) while also keeping a safe buffer above the stringent Basel III norms.
The government’s current proposal is to infuse Rs 25,000 crore each in this fiscal and the next (the PJ Nayak committee had estimated PSBs’ capital requirement at Rs 34,000 crore in FY16 and Rs 76,000 crore in FY17) and Rs 10,000 crore each in FY18 and FY19.
It, however, committed to making extra budgetary provisions in FY18 and FY19.
The total capital requirement up to FY19 (excluding the internal profit generation which will be available with the PSBs) will be around Rs 1.8 lakh crore, the finance ministry said, adding that “improved valuations coupled with value unlocking from non-core assets as well as improvements in capital productivity will enable PSBs to raise the remaining Rs 1,10,000 crore from the market”.
In the supplementary demand presented on Friday for capital infusion this fiscal, Rs 12,000 crore was sought to be provided in addition to Rs 7,940 crore already allocated in the FY16 Budget. The remaining Rs 5,000 crore would be provided in the second supplementary later this year.
The Rs 25,000 crore capital this year will be allocated through three tranches to meet three different objectives. In the first tranche, around 40% of this amount will be given to those banks that require support, and it will be ensured that every PSB will have at least 7.5% (core capital) by FY16-end. In the second tranche, 40% capital will be allocated to the top six banks — State Bank of India, Bank of Baroda, Bank of India, Punjab National Bank, Canara Bank and IDBI Bank — to strengthen them. In the third tranche, the balance 20% will be allocated to the banks based on their performance during the three quarters in the current year, to be assessed on the basis of criteria to be spelt out. The government recently shifted to performance-based criteria for recapitalisation including return on assets and return on equity.
The ministry hoped the PSBs’ market valuations will improve significantly due to the governance reforms being initiated, tight NPA management and risk controls, significant operating improvements and capital allocation from the government. The government infused capital of Rs 12,000 crore into PSBs in 2011-12, Rs 12,517 crore in 2012-13, Rs 14,000 crore in 2013-14 and Rs 6,990 in 2014-15. Gross NPAs (as a percentage of total advances) had risen to 5.2% in March from 4.7% in March 2014 and 3.8% in March 2013.
In the document detailing the capital infusion road map, the ministry observed that many large projects are strained due to a variety of legacy issues including the delay caused in various approvals as well as land acquisition and low global and domestic demand. It added that PSBs, which have got a predominant share of infrastructure financing, have been affected by this problem, in turn resulted in their lower profitability mainly due to provisioning for the restructured projects as well as for gross NPAs.
The ministry said though some PSBs are adequately capitalised and meet all the Basel III and RBI norms on capital adequacy, the government wants to adequately capitalise all PSBs to keep a safe buffer over and above the minimum norms of Basel III. It added that the government presumes that the emphasis on PSBs’ financing will reduce over the years by development of vibrant corporate debt market and by greater participation of private sector banks.
Finance minister Arun Jaitley had earlier said that to be in line with Basel III norms, there was a need to infuse Rs 2.4 lakh crore as equity in PSBs by 2018. To meet this huge capital requirement, he said, it was important to raise additional resources. While preserving the public ownership, with government holding at least 52%, the capital of these banks will be raised by increasing the public shareholding in a phased manner via sale of shares through retail to Indian citizens, he had said. The ministry wants banks to find their own resources for raising capital and also work out plans for raising capital from market. The ministry had said PSBs could also explore the possibility of selling their non-core businesses.