Government's bank recapitalisation plan actually working?

Public sector banks (PSBs) have played a pioneering role in developing India's industries, but recent evidence suggests they are being shortchanged. Large infrastructure projects have been bogged down by legacy issues, regulatory overreach, and negligence on the part of banks, which has only led to the pile of bad debt becoming bigger.

The rise in the level of non-performing assets (NPAs) has consequently led to more public money being injected into government banks to meet capital requirements. Provisioning for bad loans has impacted their profitability and growth. Private banks have been relatively more successful than their state-run counterparts in leveraging market forces to raise capital.

The gross NPA ratio of scheduled commercials banks rose from 10.2 percent at the end of September 2017, to 11.6 percent at the end of March 2018. Private banks fared much better during the period under review with an NPA ratio of only 4 percent; PSBs gross NPA ratio at the end of the period was 15.6 percent.

The government had formulated the 'Indradhanush' plan in August 2015 to resolve the issues faced by PSBs, and make them more competitive vis-à-vis private banks. The seven-pronged action plan to revamp PSBs identified both structural and policy issues that were holding back these institutions from living up to their mandate.

On the structural side, governance issues, NPAs, and a homogenous credit base have held back state-run banks. The Indradhanush plan estimated that recapitalisation to the tune of Rs 1.8 lakh crore was needed to nurse these banks back to health.

This amount was to be released in a staggered manner, spread over four years. Of the total, Rs 70,000 crore would be infused into banks by the government, while the remaining Rs 1,10,000 crore would have to be raised by banks. The government has already injected Rs 59,435 crore of the total in public banks, with the residual amount to be raised through budgetary provisions.

In January 2018, the government mooted a front-loaded bank capitalisation plan of Rs 2.11 lakh crore to augment the Indradhanush plan. Of the total, Rs 1.35 lakh crore was to be infused through sale of recapitalisation bonds, while the rest would come from budgetary provisioning and through funds raised from the market.

Public banks have been the beneficiaries of government aid, especially since the market liberalisation reforms of 1991. Union budgets presented in the last five years have earmarked money for bank capitalisation, of which Rs 83,504 crore has been spent. However, the budgetary provision for FY18 was Rs 90,000 crore, much more than the expense incurred over the last five years.

The diversion of public funds for keeping state-owned banks afloat is indicative of the systemic flaws that have culminated in mounting bad debt and over-leveraged balance sheets. Institutions like Life Insurance Corporation of India (LIC) have also been used as surrogates to stave off crisis in these banks.

The quantum of direct government support to the banking sector has increased by over 450 percent over the last four fiscal years, from Rs 15,504 crore in FY14 to Rs 86,510 crore in FY18. For the current financial year, Bank of India received the most government aid, having received at Rs 9,232 crore. It was followed by State Bank of India (SBI), which received Rs 8,800 crore.

The capital infusion by the government is broadly in line with the net losses reported by state-run banks. Of all the PSBs in the country, only Indian Bank and Vijaya Bank recorded profits in FY18. Cases of financial fraud, most notably, the one orchestrated by Nirav Modi and Mehul Choksi, pulled down the performance of Punjab National Bank, which recorded a loss of Rs 12,283 crore, the highest among PSBs. In FY18, SBI and its associates received Rs 8,800 crore in cash from the government, while recording a loss of Rs 5,339 crore for the year.

Of the 21 public banks in operation, 19 reported losses this year, resulting in numerous calls for their privatisation.

Despite the government having increased its allocation for recapitalisation of these banks by a not-so-modest amount, they are still being found wanting. Their gross NPA ratios have swelled in the recent past, with IDBI Bank reporting a GNPA ratio of 27.95 percent at the end of the June quarter, up from 24.11 percent as at the end of the same quarter last year.

The same is true in the case of United Bank of India, whose GNPA ratio rose by almost 7 percentage points over the past year. PNB's bad loans also spiked, with GNPA ratio increasing to 18.38 percent of its asset base.

Factoring in possible losses from restructured assets and additional provisioning, it would be safe to assume that more money will be need to be pumped in to ensure that public banks meet capital adequacy norms.

Source- Moneycontrol

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PNB and other PSBs may get Rs 8,000 crore lifeline

The government may infuse about Rs 8,000 crore in five or six state-run banks that are likely to fall short of regulatory capital requirements, a senior finance ministry official said. These banks may include Nirav Modi scam-hit Punjab National Bank. 

“There are some banks that have issued additional tier 1 capital bonds and the interest payments are due. Now if they don’t meet the regulatory capital norms, they will not be allowed to make such payments,” the official said. The government cannot allow public sector banks to default on such payments, which will impact their rating, the official said. 

Banks raise capital through AT1 bonds, which are perpetual in nature and therefore provide higher interest rates to investors. A high level of bad loans and widening losses have made it difficult for banks to service these bonds, raising the risk of default. 

Some banks that came under the Reserve Bank of India’s prompt corrective action (PCA) framework will also benefit from this tranche of capital infusion, said another official. The PCA framework is meant to encourage banks to avoid certain riskier activities and focus on conserving capital so that their balance sheets can become stronger. 

“These banks had issued upper tier II bonds and the interest payments are also linked to statutory capital ratios. We are doing an assessment of their requirements,” the official added. 

Earlier this year, the government had asked banks under PCA to recall AT 1 bonds. Lenders that have recalled these instruments include Oriental Bank of Commerce and Bank of Maharashtra. 

Despite recapitalisation, of the 15 public sector banks that have declared their results for FY18, the tier 1 capital position reported by only five is close to the minimum regulatory requirement of 7%, according to a recent report by rating company ICRA. 

“The coupon servicing ability for these weak banks is now contingent on their ability to raise capital immediately before their coupon payment due dates,” the report had said. Public sector banks had Rs 63,595 crore of such debt capital instruments as of April 1, of which Rs 25,831crore was issued by 11banks currently under PCA, ICRA said. 

In January, the government announced Rs 88,000 crore of capital support to 20 state-run banks for FY18 while prescribing a reforms package to make them more accountable. 

Of this amount, Rs 80,000 crore was through recapitalisation bonds and Rs 8,139 crore as budgetary support, while banks were to raise Rs 10,312 crore from the market. 

The infusion is part of a Rs 2.11lakh crore plan announced last October. The government will provide Rs 1.35 lakh crore through recapitalisation bonds, while banks will need to raise Rs 58,000 crore on their own. 

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Recapitalisation scheme for Regional Rural Banks(RRB) extended

The Union Cabinet on Wednesday extended the recapitalisation scheme for "Regional Rural Banks" (RRBs) for the next three years. 

"This will enable the RRBs to maintain the minimum prescribed capital to risk weighted assets ratio (CRAR) of 9 per cent," the Cabinet said in a statement. 

"A strong capital structure and minimum required level of CRAR will ensure financial stability of RRBs which will enable them to play a greater role in financial inclusion and meeting the credit requirements of rural areas." 

Currently, there are 56 RRBs in the country. On provisional basis, as on March 31, 2017, the total credit given by RRBs is Rs 228,599 crore. 

The scheme was started in FY2010-11 and has been extended twice in the year 2012-13 and 2015-16. The last extension was up to March 31, 2017. 

A total amount of Rs 1,107.20 crore, as the Indian government's share, out of Rs 1,450 crore, has been released to RRBs up to March 31, 2017, the statement said. 

"The remaining amount of Rs 342.80 crore will be utilised to provide recapitalisation support to RRBs whose CRAR is below 9 per cent, during the years 2017-18, 2018-19 and 2019-20." 

As per the statement, the identification of RRBs which require recapitalisation will be decided in consultation with the National Bank For Agriculture And Rural Development. 

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Government infuse over Rs. 88,000 cr in PSU banks,Which bank gets how much amt?

The government will infuse more that Rs88,000cr into public sector banks in FY18 itself, as a part of its Rs2.11lakh crore recapitalization plan to boost the capital of state owned banks.

The capital infusion plan for 2017-18 includes Rs80,000cr through Recap Bonds and Rs8,139cr as budgetary support. This plan addresses regulatory capital requirement of all PSBs and provides a significant amount towards growth capital for increasing lending to the economy.

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Government of India provided capital to six Public sector Banks

The government has provided over Rs 7,757-crore fresh equity to six stressed state-run banks to help them meet the prescribed regulatory capital requirement and state its commitment to keep banks well-funded.

Bank of India, IDBI Bank, Uco Bank, Bank of Maharashtra, Dena Bank and Central Bank of India have received equity through preferential issue of shares with two of them informing stock exchanges about the decision.

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