The finance ministry is set to expedite the issue of recapitalisation bonds worth around Rs 45,000 crore to public sector banks (PSBs) to shore up their capital base and enable them to support growth at a time when the lending ability of non-banking financial companies (NBFCs) has been severely impaired by a liquidity crunch.
The finance ministry is set to expedite the issue of recapitalisation bonds worth around Rs 45,000 crore to public sector banks (PSBs) to shore up their capital base and enable them to support growth at a time when the lending ability of non-banking financial companies (NBFCs) has been severely impaired by a liquidity crunch. The next round of bond allocation could be finalised by early December, an official source told FE. The regulator and the government would assess capital requirements of various PSBs once they declare their September quarter results.
Already, recap bonds worth close to Rs 20,000 crore have been issued to a clutch of PSBs, including fraud-hit Punjab National Bank (PNB), this fiscal. Almost all the 21 PSBs, especially the 11 banks that are under the central bank’s prompt corrective action (PCA) framework, have sought capital from the government to boost lending and meet regulatory requirements.
PNB — which was hit by a Rs 14,357-crore fraud caused by jewellers Nirav Modi and Mehul Choksi — 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 these banks — Corporation Bank, IoB and Allahabad Bank — are already under the PCA, which is aimed at nursing stressed banks back to health.
The PCA banks are expected to get the capital to meet their regulatory requirements but non-PCA ones will be given primarily growth capital.
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 had committed to infuse `65,000 crore in the current fiscal via recap bonds, on top of the `80,000-crore securities issued last fiscal.
Of the recap bonds last fiscal, the 11 PCA-banks received as much as Rs 52,311 crore. 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 Reserve Bank of India had said in its financial stability report in June. This was expected to worsen to 16.3% in the baseline scenario by March 2019 and could touch even 17.3% under the worst stress scenario, it had said. This means the PSBs have to be adequately capitalised.
Earlier this fiscal, some of the PSBs had sought capital urgently, as they were facing pressure due to interest payment to holders of their Additional Tier 1 (AT-1) bonds. Banks raise capital through AT-1 bonds, which are perpetual in nature and therefore provide higher interest rates to investors. Saddled with stressed assets, these banks had been finding it difficult to service these bonds from their own earnings.
PSBs are already planning to tap the markets to raise more than Rs 50,000 crore this fiscal. Of 21 public sector banks, over a dozen banks have already taken the approval of their boards or shareholders to raise capital through the equity market. As such, global rating agency Moody’s said in August that the government’s plan to infuse extra capital into PSBs in 2018-19 would be just about enough to meet only capital adequacy requirement and improve provisions for bad assets in loss-making banks, and that stress will still persist. The capital infusion will enable them to achieve Common Equity Tier 1 (CET1) ratios of at least 8% by March 2019, as required under the Basel III norms in India.