PSBs must retain significant part of profit for capital, also raise it from market: FM

Govt to infuse Rs 11,200 in PSBs in FY15

While making provision of Rs 11,200 crore for infusing capital in the public sector banks, Union finance minister P Chidambaram today said their directors and employees of PSBs must recognise to retain significant portion of profits for capital.

Bank unlike other industries require capital every year. They need capital for business growth and to make provisions (for NPAs). Bank boards and employees should understand that portion of net profit has to be set aside for capital, Chidambaram said a press conference after  presenting  interim budget for 2014-15 in New Delhi.

Referring to government plans for capital infusion, finance minister said this is interim (Rs 11,200) and the regular budget will full picture. He also urged them to raise capital (tier I and tier II) from market through various types of instruments.

The government has pumped Rs 14,000 crore in public sector banks in the current financial year (2013-14).  It has infused is to the tune of Rs. 62,234.24 crore in PSBs during 2005-06 to 2013-14.

CRISIL Research in a comment on budgetary provisions said the budgetary estimate of Rs 112 billion towards capital support for public sector banks (PSBs) in 2014-15 seems inadequate.

Assuming 14% credit growth, we estimate that PSBs will need Rs 50-60 billion additional Tier 1 capital infusion than the budgetary estimates in 2014-15, considering the pressure on profitability and the need to comply with the Basel III requirements, CRISIL said.

Raising capital from market – a tough task

PSBs have had tough time in raising the capital especially equity from the markets. The response to recent Qualified Institutional placement (QIP) of State Bank of India’s QIP in January 2014 was below expectations. The issue sailed through only with help of Life Insurance Corporation (LIC) and fellow state-run banks who subscribed to over 50% of QIP.

Many state-run banks have put their qualified institutional placement (QIP) issues on hold till the market sentiment improves, as they believe convincing foreign institutional investors (FIIs) to purchase their shares amid stock market volatility will be a difficult task.

Several public-sector lenders — Syndicate Bank, Allahabad Bank, Dena Bank, IDBI Bank, Syndicate Bank and Indian Overseas Bank, among others — had over the past few months announced their plans to raise money through the QIP route.

These issues were aimed at raising over Rs 4,000 crore.  But FIIs’ muted response to the share-sale programme of State Bank of India, the country’s largest lender, has made most of them wary.

While some of the banks have decided to wait till the market conditions improve, others are planning to tap the private-placement route for funds.

With weak financial and credit profile, many public sector bank stocks are trading (price) below their book value. Their profitability has been under pressure due to higher provisioning for stressed loans (non performing assets and restructured loans) plus the reversal of interest income for NPAs.

The slowdown in the loan growth has also impacted interest and fee-based income. This has hit the internal capital generation capacity of banks in 2013-14, said a top executive with large public sector bank.

Banks infused about Rs 35,000 crore from their retained earnings in 2011-12 and Rs 37,936 crore in 2012-13, according to government data.