The government is unlikely to allocate capital for infusion into state-run banks in the Budget for FY24, thanks to their improved profitability in recent years and easing bad loan ratios, according to official and banking sources.
The government was forced to capitalise public sector banks (PSBs) for about 15 years through FY22, more so after an asset quality review, undertaken in December 2015, revealed a massive bad loan crisis. It infused as much as `3.3 trillion between FY16 and FY21 into PSBs to shore up their capital base and help them cope with the crisis, caused by “indiscriminate lending” during the UPA era. In FY22, `15,000 crore was earmarked for infusion. However, it hasn’t budgeted for any capital infusion in FY23.
“PSBs have raked in good profits this fiscal. Both gross and bad loan ratios have improved and capital adequacy position remains sound. Companies have also deleveraged substantially in recent years. So, conditions are favourable for further credit growth, without much concern about asset quality. There is unlikely to be any requirement for further infusion in FY24,” one of the sources told FE.
The country’s 12 PSBs recorded a 50% jump in their profitability in the second quarter of FY23 from a year before, to `25,685 crore. Their total net profit in the first half of this fiscal stood at `40,991 crore, up 31.6% from a year before.
Commenting on their performance, finance minister Nirmala Sitharaman recently said the steps taken by the government in the past few years to reduce bad loans and bolster the balance sheets of PSBs were showing “tangible results”.
Importantly, no state-run bank is under the prompt corrective action regime anymore (Central Bank was the last to be out of it earlier this fiscal).
The gross bad loan ratio of PSBs dropped substantially from 14.6% as of March 2018 to 7.4% as of March 2022, while the net NPA ratio declined to 2% from 8% during this period. The ratio went down further this fiscal.
With the improvement in their balance sheets, the banks are now 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%.
Gross bank credit has been steadily rising this fiscal and the growth hit 17.9% in October from a year before; the non-food credit growth was as high as 18.3%. The credit growth is likely to be in double digits for FY23, according to CARE Ratings.