Recapitalising PSU banks: Is it enough?

Global rating agency Fitch estimates the banking system needs around $90 bn of capital

The market has welcomed government’s plans to infuse Rs 22,915 crore in 13 public sector banks as equity. At present, NSE’s PSU bank index is up 0.46 per cent at 2,921. 

It meets capital requirement needs of PSBs to regulatory norms for now. Yet, the question remains if this amount is adequate?

  

Bankers and analysts say that the amount infused is inadequate as requirements have gone up. RBI's asset quality review in 2015-16 has pushed up the provisioning requirements and brought a pool of bad loans on the books of banks. Internal capital generation capacity will be limited in the medium term for most PSBs as they have to set aside a lot of funds to provision for those bad loans. 

The funds released by the government is 92 per cent of the budgeted provision of Rs 25,000 crore in 2016-17. The government has committed  to infuse Rs 70,000 crore as equity in PSBs under the Indradhanush plan. 

Global rating agency Fitch estimates the banking system needs around $90 bn (Rs 6 trillion or 4% of GDP in FY17) of capital. Many public-sector banks are likely to find it difficult to access new capital from non-government sources.

Listed PSBs, except State Bank of India and Bank of Baroda are now trading at a significant discount to their book value. The price to book value ratio of traded PSBs falls between 0.29 to 1.24. This limits their ability to attract external capital to support potential acquisitions as doing so will be dilutive to current shareholders.

These limitations restrict the ability of the banks to capitalize themselves on their own accord.