The government may have to fork out more funds for public-sector banks (PSBs) in the current fiscal than estimated earlier as part of its unprecedented Rs 2.1-lakh-crore capital infusion plan over two years, as massive provisioning requirements to cover for bad assets have taken a toll on their capital base, banking sources said.
The government may have to fork out more funds for public-sector banks (PSBs) in the current fiscal than estimated earlier as part of its unprecedented Rs 2.1-lakh-crore capital infusion plan over two years, as massive provisioning requirements to cover for bad assets have taken a toll on their capital base, banking sources said. Chiefs of 11 PSBs that are under the central bank’s prompt corrective action (PCA) framework on Thursday met interim finance minister Piyush Goyal, who promised all possible help in his first major meeting with bankers since taking over the finance portfolio in the absence of Arun Jaitley. “The presentations of some of these banks through the day indicate they require more capital in 2018-19 than estimated earlier,” a source told FE.
PSBs were offered Rs 90,000 crore (of which Rs 80,000 crore was in the form of bonds) in 2017-18 and securities worth another Rs 65,000 crore is to be provided to them in the current fiscal. Any further infusion, if finally approved, ahead of an election year could be done through recapitalisation bonds — which will be the government’s off-Budget liabilities — to avoid worsening the fiscal deficit. However, the interests on such bonds are part of the Budget.
For their part, each of the 11 banks submitted the progress report on the reforms undertaken by them in lieu of the capital they received from the government and presented their turnaround plan for the coming quarters on Thursday. The 11 banks under the PCA are IDBI Bank, Bank of India, UCO Bank, Central Bank of India, Indian Overseas Bank (IOB), Oriental Bank of Commerce, Dena Bank, Bank of Maharashtra, United Bank of India (UBI), Corporation Bank and Allahabad Bank.
Already, earlier this month, Dena Bank and Allahabad Bank were slapped with restrictions on lending. What worries analysts is the fact that four other banks — IDBI Bank (net non-performing asset or NPA ratio of 16.02%), IOB (13.08%), Bank of Maharashtra (12.17%) and UBI (11.96%) — have reported higher net NPA ratio than Dena Bank (11.52%) for the December quarter of FY18. The 11 stressed banks make up for 30% of deposits and 29% of advances of all the 21 PSBs.
Losses on bond portfolios, strict provisioning norms — including the one that stipulates up to 50% provisioning for stressed assets under insolvency proceedings by June — and a string of scandals (including the Rs 14,357-crore fraud at Punjab National Bank) are straining the finances of PSBs, especially the ones under PCA.
“We will ensure very orderly growth of the industry and highest levels of probity and accountability that is expected of public sector banks,” Goyal said. As part of the already-proposed recapitalisation move, a total of Rs 1,45,000 crore would be mobilised through the issuance of recapitalisation bonds over two years through 2018-19 and around Rs 58,000 crore by the dilution of government equity in various PSBs. The government provided some Rs 10,000 crore under the Indradhanush recapitalisation plan in 2017-18.
Under PCA, banks face restrictions on distributing dividends and remitting profits. Besides, the lenders are stopped from expanding their branch networks and need to maintain higher provisions. Management compensation and directors’ fees are also capped.
Goyal said: “I must place on record that we are very appreciative of the fact that finally the Reserve Bank of India (RBI), since the Modi government came in, is ensuring proper banking supervision, is taking action against defaulters, something which I believe under previous governments was not given the kind of serious attention that it deserved.”
Earlier this week, Moody’s acknowledged the final stage of a multi-year initiative by the RBI to push banks to recognise problem assets more accurately will reduce profitability for the sector in the near term, but produce benefits over the longer term. The gross NPAs with all banks touched as much as Rs 840,958 crore as of December 2017, with most concentrated in the PSB space.
Capital infusion has been tied to strict performance goals of PSBs, incorporating 30 action points on operational efficiency, portfolio diversification, smoother lending to small and medium enterprises and strict risk monitoring to avoid such a massive pile-up of bad debts in future.