Capital for banks not a problem: FM, RBI

Banks told to take tough measures to clean up their balance sheets

The finance ministry and the Reserve Bank of India (RBI) have assured bad debt-ridden public sector banks (PSBs) of adequate capital support next financial year. Banks need to take tough measures to clean up their balance sheets and Finance Minister Arun Jaitley has assured that the government will provide enough funds for banks to sort out their stressed assets problem.

The tough measures the banks will have to take will cause short-term pain, particularly in the form of higher provisioning in the December 2015 and March 2016 quarters but sources said these will be beneficial in the long term to state-owned banks.

"We have provided Rs 25,000 crore to the banks this financial year and promised to recapitalise them to the tune of another Rs 25,000 crore next year. If resources are there, I may provide even more," Jaitley told CNBC Awaaz. RBI sources said capital would be made available to banks and liquidity was plentiful.

The promise came one-and-a-half months before the Budget for 2016-17 and on a day the bank stocks came under heavy selling pressure on stock exchanges.

In July 2015, the finance ministry had said public sector banks would need Rs 1.8 lakh crore extra capital over the next four years and would provide Rs 70,000 crore of this - Rs 25,000 crore each in FY16 and FY17 and Rs 10,000 crore each in FY18 and FY19. Jaitley, however, asked the banks to take tough steps to recover their bad debts.

RBI Governor Raghuram Rajan had said last month that he expected banks to clean their balance sheets by March 2017.

There are three categories of problem loans. The first is specific to banks which have weak assets. The second is of system-wide debt, which could be because of delay in commencement of projects. Stressed loans in both these categories will have to be provided for in Q3 and Q4 of FY16. The third category is possible an emerging weakness in restructured portfolio, which will need to be taken up in FY17.

The bad loan situation for the banking sector worsened in FY16. According to RBI's Financial Stability Report December 2015, the gross non-performing assets (NPAs) of all scheduled commercial banks increased to 5.1 per cent in September 2015 from 4.6 per cent in March 2015. The gross NPAs for PSBs stood at 6.2 per cent in September 2015.

Stressed advances ratio increased to 11.3 per cent from 11.1 per cent during the same period for all banks, with PSBs recording the highest level of stressed assets at 14.1 per cent. In case banks need further assistance, other regulatory measures such as deferred tax assets etc could be provided.

NPAs of PSBs

• 6.2% Gross non-performing assets (GNPAs) of public sector banks (PSBs) in September 2015
• 3.6% Net NPAs of PSBs in September 2015, an increase from 3.2% in March 2015
• 14.1% PSBs' stressed assets in September 2015

RBI's Stress test

• Under baseline scenario, PSBs' GNPA could go up to 6.3% in Sept 2016 & improve to 5.8% in Mar 2017
• Under severe stress scenario, it may increase to 8% by Mar 2017

Source: Financial Stability Report, December 2015