Public sector banks to get Rs 11,200 cr in FY15

State lenders must retain a significant portion of profits for capital, also raise it from market: FM

While making provision of Rs 11,200 crore for infusing capital in public sector banks (PSBs), Union Finance Minister P Chidambaram said their directors and employees must recognise the need to retain a significant portion of profits for capital.

Banks, unlike other sectors, require capital every year, for business growth and to make provision (for non-performing assets, NPAs), Chidambaram noted at a press conference after presenting the interim Budget.

On government plans for capital infusion, the finance minister said this was interim (Rs 11,200 crore); the regular Budget would give a full picture. He also urged banks to raise capital (Tier-I and Tier-II) from the market, through various instruments.

BANKING BLUES

• PSBs also urged by FM to work to get capital from markets
• CRISIL Research said the Rs 11,200 crore for PSB capital support in 2014-15 seemed inadequate
• Banks infused about Rs 35,000 crore from their retained earnings in 2011-12 and Rs 37,936 crore in 2012-13
• Market not conducive for PSBs’ capital-raising, due to weak profile
• Many PSBs have put their Qualified Institutional Placement plans on hold till market sentiment improves

The government has put Rs 14,000 crore in PSBs this financial year (2013-14). It infused Rs 62,234 crore in PSBs between 2005-06 and 2013-14.

CRISIL Research said the Rs 11,200 crore for PSB capital support in 2014-15 seemed inadequate.

“Assuming 14 per cent credit growth, we estimate PSBs will need Rs 5,000-6,000 crore additional Tier-1 capital infusion, considering the pressure on profitability and need to comply with Basel-III requirements,” it said.

PSBs have had a tough time in raising capital, especially equity, from the markets. The response to State Bank of India’s recent Qualified Institutional Placement (QIP, in January) was below expectation. It went through only due to help from Life Insurance Corporation and fellow state-run banks, which subscribed to over half the issue.

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

Several PSBs — Syndicate Bank, Allahabad Bank, Dena Bank, IDBI Bank and Indian Overseas Bank, among others — had over recent months announced plans to raise money through QIP. While some have decided to wait till the market improves, others plan to tap the private placement route.

With a weak financial and credit profile, many PSB stocks are trading below book value. Their profitability has been under pressure due to higher provisioning for stressed loans (NPAs and restructured loans), plus the reversal of interest income for NPAs.

A slowdown in loan growth has also impacted interest and fee-based income. This hit their internal capital generation capacity in 2013-14, said a top PSB executive.

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.