Little in Budget for stress loan-laden banks

Bad bank proposal very much on government agenda: Jaitley

The government’s provision of Rs 10,000 crore for infusing equity into public sector banks (PSB) and its assurance to infuse more on requirement has fallen short of expectations. PSBs, which are reeling under bad loans, need more capital from the government, considering that they will find it difficult to raise money from markets due to low valuations. 

Referring to the Budget proposal, bankers said the total capital requirement till March 2019 is pegged at Rs 1,80,000 crore. Out of that, the government has committed Rs 70,000 crore and it expects banks to raise Rs 1,10,000 crore from market. This estimate was made in August 2015 and the situation now is very different, they say. Many PSBs have reported only small profits or are going in losses.   

Karthik Srinivasan, group head-Financial Sector ratings, ICRA, said retaining Rs 10,000 crore for recapitalising PSBs, as envisaged under the Indradhanush plan, is a disappointment as these banks require Rs 45,000 crore to Rs 50,000 crore of the total Tier 1 capital in FY2018. However, the assurance of more funds, if required, offers some comfort. 

Pankaj Patel, president of the Federation of Indian Chambers of Commerce and Industry (FICCI), said this figure will have to be increased during the course of the next fiscal, given the actual requirements of the banks and the need to support growth.

The amount for recapitalisation of PSU banks will be a morale booster in scenarios where the banks are in dire need of capital for credit growth and Basel III compliance, added Ashwani Kumar, chairman and managing director, Dena Bank.

Meanwhile, in a post-Budget media interaction, Finance Minister Arun Jaitley said the idea of a centralised Public Sector Asset Rehabilitation Agency (PARA) to take over bad loans is very much on the government’s agenda. The Economic Survey for 2016-17 had mooted a proposal to float PARA as an effective solution for big-ticket stressed loans. 

The agency could take charge of the largest, most difficult cases and make politically tough decisions to reduce bad loans covering non-performing assets and restructured loans.

Referring to steps for tackling bad loans, the finance minister said the focus remains on resolving the stressed legacy accounts of banks. The legal framework has been strengthened to facilitate resolution through the enactment of the Insolvency and Bankruptcy Code and the amendments to the SARFAESI and Debt Recovery Tribunal Acts.  

Listing and trading of security receipts issued by a securitisation company or a reconstruction company under the SARFAESI Act will be permitted in SEBI-registered stock exchanges.

Sai Venkateshwaran, partner and head-Accounting Advisory Services, KPMG, said this will enhance capital flows into the securitisation industry and will particularly be helpful in dealing with bank NPAs.  However, this needs to be done with adequate safeguards and should possibly be restricted to sophisticated investors who understand the risks associated with it.

The government also extended sops to banks for setting aside money as a provision for bad loans. Jaitley said as a step to give a boost to the banking sector, the government proposes to increase the allowable provision for NPAs from 7.5 per cent to 8.5 per cent. This will reduce the tax liability of banks.  

Kumar said the deductions allowed for the NPA provisions made by banks have been increased to 8.5 per cent of the income. This will act as a breather in supplementing the profitability of the banks.

The government also proposed to tax the interest receivable on actual receipts instead of on an accrual basis for NPA accounts of all non-scheduled cooperative banks. This will also be on a par with scheduled banks.

Banks feel the push

• Outlay for capital infusion in public sector banks pegged at Rs 10,000 crore
• Total capital requirement for 2016-2019 is Rs 1,80,000 crore
• Government expects banks to raise Rs 1,10,000 crore from market
• Listed public sector banks have low valuation
• Resolution of stressed loans is a painfully slow process 
• The proposal for “bad bank” to take over non-performing assets revived