Union Budget 2015: Capital blow to ‘weaker’ PSBs as govt to apply Darwin’s law

By: and |
New Delhi | Updated: March 2, 2015 8:39:52 AM

Survival of the fittest: Infusion based on RoA & RoE may hit banks with limited ability to raise capital

With a recapitalisation budget of only R7,940 crore, public sector banks like Bank of Maharashtra, Corporation Bank, Central Bank of India and United Bank are likely to miss out if the finance ministry retains its criteria for allocation based on return on assets (RoA) and return on equity (RoE).

Data compiled by Capitaline show that among public sector banks, United Bank has the lowest return on equity at -29.1% in FY14, followed by Central Bank at -8.57% and Indian Overseas Bank (IOB) at 4.51%. Bank of Maharashtra had an RoE of 6.4% and Corporation Bank’s  5.7%.

Earlier last month, the government had announced its plans to recapitalise nine PSBs based on their last three years’ weighted average return on assets (RoA) and their return on equity (RoE).

Union Budget 2015, Budget 2015, Arun Jaitley, Bank of Maharashtra, Corporation Bank, Central Bank of India, State Bank of India, Bank of Baroda, Punjab National Bank, Canara Bank, Syndicate Bank

Under the new criteria, only nine banks — State Bank of India, Bank of Baroda, Punjab National Bank, Canara Bank, Syndicate Bank, Allahabad Bank, Indian Bank, Dena Bank and Andhra Bank — were selected for a R6,900-crore capital infusion in FY15. The chunk of it — R2,970 crore was allocated to SBI — followed by BoB at R1,260 crore and PNB at R870 crore.

A Credit Suisse report issued on Saturday said the government’s allocation is almost the same as their estimate of total dividend likely to be paid by all PSU banks to the government in FY16.

“Weaker PSU banks with limited ability to raise capital from markets will be worst affected as there is very little likelihood of getting capital next year as well,” the note said, adding that it looks like the government capital infusion going forward could be a function of only the profit generation ability of PSU banks. In January 2015, the government had organised a retreat for chiefs of public sector banks in Pune to generate ideas to revitalise the industry. One of the issues discussed was performance-based capital inclusion.

“We didn’t expect that it will get implemented, we thought maybe we will have a little more dialogue on the subject and the transition period to move through because we have two class of banks in the banking industry,” VR Iyer, CMD, Bank of India, told analysts at its Q3 FY15 results.

Iyer said while certain banks are predominantly domestic-oriented, the second category have have a wider international presence. She added that despite BoI having significant overseas operations, which usually lowers margin and in turn reduces profit, it did not impact the bank’s return on asset. “So, I personally believe there ought to be a different treatment for banks like us,” Iyer said.

The Budget also proposed to set up an autonomous bank board bureau to improve the governance of PSBs.  This bureau will select the heads of PSBs and help them in capital-raising plans going ahead.

Credit Suisse analysts added that 42% of PSU banks have their tier-I capital at less than 8% and the lack of capital will constrain their ability to grow. To meet Basel-III norms by March 2019, banks will have to maintain a minimum total capital adequacy ratio of 9% and tier-I capital ratio of 7%.

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