The Union government may infuse Rs 20,000 crore through recapitalisation of bonds into state-owned banks in the fourth quarter of the fiscal year.
On Monday, the government sought Parliament nod for “meeting additional expenditure of Rs 20,000 crore towards recapitalisation of public sector banks (PSBs) through issue of government securities”.
Even as a senior government official said that the funds would be sufficient to take care of the capital needs of PSBs this fiscal year, experts feel otherwise. Reserve Bank of India (RBI) Governor Shaktikanta Das had said in July that a recapitalisation plan for banks had “become necessary” and called for lenders to raise money in advance to “build resilience” in the financial system.
According to the RBI, the gross non-performing asset (NPA) ratio of PSBs will surge to 15.2 per cent by March 2021, from 11.3 per cent a year back under a baseline scenario. But the RBI’s assessment was done in its Financial Stability Report of July, which had not factored in the loan restructuring scheme announced by the regulator in September.
“Given the capital infusion announcement is at the lower end of estimates, we maintain that the capital cushion for PSBs will remain low above regulatory levels unless these banks are able to raise some capital from markets or the RBI defers peak capital requirements, which are scheduled to increase from September 30,” said Anil Gupta, sector head-financial sector ratings, ICRA.
ICRA had in August estimated that PSBs would require capital to the tune of Rs 20,000-55,000 crore for 2020-21 (FY21) as fresh NPAs would reduce after the restructuring of stressed loans. It had earlier estimated higher capital requirements of Rs 46,000-82,600 crore before the RBI announced loan restructuring. ICRA estimates that the gross slippage rate (of good loans into bad) will be around 3-4 per cent, from its earlier assessment of 5-5.5 per cent.
“We will not front-load capital into state-owned banks. The capital requirements for banks have been changing. We wanted to ensure we secured Parliament nod in case we needed to infuse capital into banks after assessing their needs later this year,” said a senior government official. The official added that the provision coverage ratio — provisions made against bad loans — stood at 80 per cent for banks.
The recapitalisation money would go towards meeting the Covid-19-related provisioning requirements of banks and a fair assessment would be possible after the impact of loan moratorium was visible on the books of banks in the third quarter, added the official.
“The good part is that the recapitalisation needs of banks will not be big this fiscal year after the loan restructuring announcement by the RBI,” the official added.
Gupta added that the government may rely on banks to raise capital from the markets. This will reduce the overall capital infusion requirements from the government.
The government has infused Rs 3.5 trillion into PSBs in the past few years, with the previous round of recapitalisation taking place in September 2019, when the government decided to front-load a major share of the Rs 70,000-crore into banks. Most of the capital infusion has taken place through issuance of bonds, which does not have an immediate impact on the government’s finances, but it becomes a liability in the years to come due to interest payment. Finance Minister Nirmala Sitharaman had, during her Union Budget speech for FY21 in February, avoided announcing recapitalisation of PSBs this fiscal year. The government had infused Rs 80,000 crore into PSBs in 2017-18 and Rs 1.06 trillion in 2018-19 through recapitalisation bonds.
Bankers had told Business Standard last month that the capital requirement in this fiscal year may not be big for lenders due to a host of measures taken by the government and the RBI.
The state-owned banks also expect a delinquency, or the proportion of slippage of good loans into bad, of 5 per cent as was seen in the past two-three years. The provisioning requirement for PSBs would be Rs 1 trillion if the overall credit in the system is Rs 100 trillion and banks make an annual operating profit of Rs 1.5 trillion.