Demonetisation windfall for banks: After SBI, FPO, other PSBs like Bank of Baroda, IDBI Bank to hit market

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Published: December 28, 2016 6:25:18 AM

A clutch of public sector banks are looking to tap the market to shore up their capital base during the first two quarters of the next financial year.

post-demonetisation, State Bank of India, NPA, FPO, BanksA clutch of public sector banks are looking to tap the market to shore up their capital base during the first two quarters of the next financial year. (Source: Reuters)

With post-demonetisation surge in deposits potentially stepping up lending and improving their non-performing asset (NPA) ratios, a clutch of public sector banks are looking to tap the market to shore up their capital base during the first two quarters of the next financial year. Closely following the announced follow-on public offer of the State Bank of India in June quarter, Bank of Baroda and IDBI Bank could too raise capital via qualified institutional placements (QIP), sources told FE.

While FE could not confirm the plans from the individual banks, sources said the department of financial services and the Reserve Bank of India (RBI) are working separately on the capital requirement of PSBs in the changed circumstances. “We expect NPA ratios of PSBs to decline going forward as banks, flooded with deposits after demonetisation, step up lending. The improvement would help them tap market for capital,” an official said.
SBI, whose FPO has been in the pipeline for about two years, could finally tap the market after merger of its five associates and Bharatiya Mahila Bank with itself by March-end. With 22% share of bank loan assets in the country, SBI is best suited for public offer to raise growth capital at this juncture, the official added.

SBI is also the biggest beneficiary under the R70,000-crore capital infusion in PSBs by the government under Mission Indradhanush between FY16 and FY19. It has got R13,106 crore or 27% of R48,000 crore that the Centre has infused in 19 PSBs since the previous fiscal year. Unlike other PSBs, SBI got capital for growth while most others used the funds to meet the capital adequacy norms.

With high NPAs making bank stocks less attractive, PSBs have raised very little as against the projected mobilisation of R1.1 lakh crore via this route in the four years from FY16. So, SBI’s earlier plan for QIP has been dropped for now to give way to other PSBs to tap the route including BoB and IDBI Bank. The government had given its nod some time ago for a R3,771-crore QIP of IDBI Bank. IDBI’s earlier attempts could not succeed due to lack of appetite among investors after NPAs rose in the banking sector.

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The gross NPAs of the PSBs has shot up from R2.77 lakh crore in September 2015 to R5.59 lakh crore at end-June 2016 after RBI’s asset quality review guidelines made provisioning mandatory for certain assets. 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. As a consequence, higher provisioning has shaved off many PSBs’ bottom lines.

While the government will stick to R25,000-crore capital infusion plan for FY17, it is yet to take a call whether the plan to infuse R10,000 crore each in FY18 and FY19 in PSBs should be revised. “That exercise is going on now,” another official said.

PSBs have been at the forefront in dealing with the aftermath of the scrapping of R500 and R1,000 notes on November 8. Banks are understood to have received about R14 lakh crore in scrapped note deposits while nearly R6 lakh crore has been supplied to public as part of remonetisation since November 10.

Rating agency Fitch has estimated that Indian banks need around $90 billion (R6 lakh crore) in extra capital by March 2019 to support credit growth and meet steadily increasing regulatory requirements. Bulk of R6 lakh crore would have to be raised by PSBs who have over 70% market share in banking sector loan assets. SBI has already raised R9,100 crore via AT1 papers so far in FY17.

Under the Basel-III norms, AT-1 bonds come with loss absorbency features, meaning that in case of stress, banks can write off such investments or convert them into common equity.

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