PSU Banks: Government plans no cut in Rs 65,000 crore infusion

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New Delhi | Updated: November 22, 2018 6:40:18 AM

The government is unlikely to trim its planned Rs 65,000-crore infusion into public sector banks (PSBs) this fiscal, despite the central bank board’s move on Monday to defer the complete rollout of the capital conservation buffer (CCB) norms for banks by a year to March 2020.

Losses on bond portfolio, strict provisioning norms (including the one that stipulates up to 50% provisioning for stressed assets under insolvency proceedings) and a string of scandals, such as the one at PNB, have starved PSBs of capital.

The government is unlikely to trim its planned Rs 65,000-crore infusion into public sector banks (PSBs) this fiscal, despite the central bank board’s move on Monday to defer the complete rollout of the capital conservation buffer (CCB) norms for banks by a year to March 2020. However, post the Reserve Bank of India (RBI) decision, some of the large banks like Punjab National Bank (PNB) may require lower amounts from the Centre. The latest relaxation by RBI is expected to reduce banks’ capital requirement by around Rs 35,000 crore. The government has already issued recapitalisation bonds of about Rs 20,000 crore to a clutch of PSBs this year and the plan to release another Rs 45,000 crore will be finalised by end-December.

Sources told FE that stressed state-run banks — 11 of the 21 PSBs are under the corrective regime of the RBI —may still need more capital than assumed earlier to meet regulatory requirements. Also, a poll-bound government doesn’t want a leash on lending — especially to employment-intensive small and medium enterprises — at a time when the ability of non-bank lenders is strained by a liquidity crunch. Of course, without any relaxation of the buffer norm, the capital requirement of PSBs, those under the prompt corrective action framework in particular, would have been even higher.

After the RBI board’s decision, a Crisil report suggested that state-run lenders would need Rs 85,000 crore this fiscal to meet the Basel III norms, as against Rs 1.2 lakh crore earlier. Some of the large banks need less capital to meet regulatory requirement now. For instance, PNB, which has been struggling to recover from the Nirav Modi fraud, may require around Rs 2,500 crore less than an initial estimate this fiscal, said a senior government official.

“Banks are reassessing their capital needs after the RBI board decision. The government will decide on the next round of capital infusion once it receives the latest requirement details from banks,” one of the sources said. PNB — which was hit by a Rs 14,357-crore fraud — has already been provided the highest amount (Rs 8,247 crore) in two tranches so far this fiscal, followed by Corporation Bank (Rs 2,555 crore), Indian Overseas Bank (Rs 2,157 crore), Andhra Bank (Rs 2,019 crore) and Allahabad Bank (Rs 1,790 crore), said the source. Three of them — Corporation Bank, IOB and Allahabad Bank — are already under the PCA, which is aimed at nursing stressed banks back to health.

Losses on bond portfolio, strict provisioning norms (including the one that stipulates up to 50% provisioning for stressed assets under insolvency proceedings) and a string of scandals, such as the one at PNB, have starved PSBs of capital. As part of the already-approved Rs 2.11-lakh-crore recapitalisation move, the government will issue recap bonds worth a total of Rs 1,45,000 crore over two years through 2018-19 and around Rs 58,000 crore will be mobilised through the dilution of government equity in various PSBs. Apart from the bonds, the government had provided budgetary support of Rs 10,000 crore to PSBs in 2017-18 under the Indradhanush plan.

As of March 2018, the gross non-performing asset (NPA) of all PSBs stood at a massive 15.6%, the RBI had said in its financial stability report in June. This was expected to worsen to 16.3% by March 2019 in the baseline scenario and could touch even 17.3% under the worst stress scenario, it had said. This means the PSBs have to be adequately capitalised.

According to the RBI’s capital adequacy norms, banks are required to maintain the minimum capital-to-risky-asset ratio (CRAR) at 9% (higher than the Basel-III requirements of 8%). On top of this, they were mandated to keep a capital conservation buffer of 2.5% in phases by March 2019. The implementation of the last phase of the buffer requirement—0.625% in 2018-19—has now been deferred by a year. This means the capital that would have been locked to meet regulatory requirements on buffer will be freed up now. This, in turn, will enable banks to step up lending.

The decision to ease the deadline was taken at Monday’s nine-hour marathon meeting of the RBI board, which marked a sharp drop in the tension between the government and the central bank on a host of issues, including capital requirements for banks.

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