Capital infusion in PSBs should be based on ability to manage stress

Govt allocated Rs 6,990 cr towards capital infusion in nine PSBs last financial year

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Indicating its discomfort with the government’s strategy of infusing capital in public sector banks based on efficiency parameters like return on equity and return on assets, the Reserve Bank of India (RBI) today said capital should infused to banks that has exhibited greater resolve to clean up their balance sheet.

“A targeted infusion of bank capital into scheduled public sector commercial banks, especially those that implement concerted strategies to clean up stressed assets, is also warranted so that adequate credit flows to the productive sectors as investment picks up,” the central bank said in the second bi-monthly policy statement of 2015-16.

The government has allocated Rs 6,990 crore towards capital infusion in nine PSBs the last financial year. For the allocation of capital, two parameters were considered — the weighted average return on assets (RoA) for all PSBs for the past three years (those scoring above average were considered) and return on equity (RoE) in the last financial year.



There was a view in the Mint Road that banks should have been surprised with by implementing the new norms with immediate effect and they should have been given time to adhere to the parameters. The ministry is now in discussion with banks to tweak the norms on capital infusion.

“Some public sector banks will need more capital to clean up their balance sheets and support lending as investment revives,” RBI said while making a case for government support in the banks. Most of the public sector bank has seen their capital position depleting as bad loans rise.

These banks are unable to tap the equity markets for raising capital due to subdued valuations mainly caused by high NPA. The central bank has taken initiatives to address quality issues and released a framework for early identification of stress and suggested ways to resolve such issues. 



“Going forward they need capital both to absorb some of the provisions and when the economy picks up. Capital can be raised in many ways. One way is to issue new shares if they have access to the market, the other is the big owner that is the government putting in more money. The third possibility is reducing dividends in case the bank is not in a very healthy position,” Rajan said in an interaction with the media.

The government plans to infuse Rs 7940 crore capital in public sector banks in the current financial year.