Govt's decision on capital infusion in PSBs to trigger consolidation

The move might curtail growth ambitions and debt capital will become costly

The government’s decision to deny capital to less efficient public sector banks (PSBs), at least for now, will force them to curtail growth ambition, clean their books and pay a higher coupon rate on bonds.

It could also set the stage for a consolidation in the sector.

The government over the weekend decided to reward with equity capital (about Rs 6,990 crore) only nine PSBs, on the basis of return on equity and assets.

Those left out are Bank of India, Indian Overseas Bank, Union Bank of India, Bank of Maharashtra, Oriental bank of Commerce and Corporation Bank.

PSB executives said the thrust on efficiency is welcome but the timing was questionable. For, most state-owned banks face challenges due to big asset quality pressures, large scale retirement and a leadership gap at the top.

Ananda Bhoumik, senior director, India Ratings, said the banks not to get the new capital had a 30 per cent share in banking assets, a significant amount. As they wouldn't be abandoned, the issue would be of providing timely support. The impact could be on the cost of borrowing from the market. This is true of both non-equity capital (tier-I and tier-II) and money raised through commercial deposits.

Analysts said there was a bunching of banks, with very little difference in the coupon (interest rate) on bonds issued by them.

This was despite the differences in asset quality and perception about quality of management.

The similar treatment is based on the common owner, the Government of India.

Rating agency ICRA said the new performance criteria for equity infusion was a step in the right direction but could lead to a shake-up in the system in the absence of a transition period, given the pending structural issues.

A senior executive with Indian Banks’ Association said the banks which failed to figure in the list would drive them to review growth ambitions and intensify efforts to repair balance sheets.

Employee unions are critical. The All India Bank Employees Association said the government's approach was discriminatory and undesirable.

The government was the mother of all PSBs and a mother is expected to take care of all her children, particularly the weaker ones. Such discrimination between banks was an attempt to allow market pressures to operate and to further weaken the weak banks, it said.

EFFECTS OF DENYING CAPITAL ON BANKS

• Debt capital — Tier I and II bonds — will become costly
• Risks rating downgrades
• Curtail growth ambitions
• Get house in order
• Opt for aggressive recoveries