By 2018-19, the government will infuse Rs 70,000 crore into public sector banks, 42 per cent of these banks' overall estimated requirement of Rs 1,80,000 crore. While Rs 25,000 crore each will be infused this financial year and the next, Rs 10,000 crore each will be provided in 2017-18 and 2018-19.
Through capital infusion, the government hopes to address the fact that these banks' funds are stuck with large projects that are stranded due to various reasons. Among these, the government says, are delays in land acquisition and clearances.
Finance Minister Arun Jaitley said, "In the past, the government has talked about it. But this time, the government is actually implementing it. This will give a boost to investment and growth in India."
The government has also changed its criteria of allocating money to state-owned lenders on the basis of efficiency, at least for this financial year.
Since the Budget had estimated only Rs 7,940 crore of capital infusion this financial year, the government on Friday sought an additional Rs 12,010 crore in the supplementary demand for grants, tabled in the Rajya Sabha. "The remaining Rs 5,000 crore would be provided in the second supplementary later this year," said a statement by the financial services department.
This year, the allocation would be in three tranches. About 40 per cent, or Rs 10,000 crore, would be given to banks that require support in the first phase; every bank will have a capital adequacy ratio of at least 7.5 per cent by 2015-16.
As of March 31 this year, Indian Overseas Bank, Union Bank of India, Dena Bank, IDBI Bank, Corporation Bank and Canara Bank had common tier-I ratios of less than 7.5, according to data sourced from India Ratings.
In the second tranche, State Bank of India (SBI), Bank of Baroda (BoB), Bank of India, Punjab National Bank (PNB), Canara Bank and IDBI Bank would be given similar amounts.
Reacting to the news, SBI shares closed with a gain of 13.5 per cent on Friday, while the BoB stock was up 5.3 per cent, PNB 0.7 per cent, Canara Bank 5.2 per cent and IDBI Bank 6.5 per cent.
The remaining Rs 5,000 crore will be allocated based on the performance of banks during the three quarters ending March 2016. "This will incentivise them to improve their performance this financial year," said the statement by the financial services department.
In 2014-15, the government had infused Rs 6,990 crore into nine state-run banks, including SBI and PNB, based on efficiency parameters such as return on assets and return on equity. That was, however, much below the promised sum of Rs 11,200 cr.
As the eligibility criteria for fund infusion had triggered an outcry from a few lenders, the government has now decided in FY16, such criteria would be applicable to infusion of only Rs 5,000 cr; that, too, in the third phase.
The government's estimate of the required capital infusion of Rs 1,80,000 cr in four years is based on expected credit growth of 12 per cent this financial year and 12-15 per cent each in the next three. The estimates exclude the internal profit generation of banks.
The finance ministry said as of now, public sector banks were adequately capitalised and met all Basel-III and Reserve Bank of India (RBI) norms. The government is, however, keen on a buffer over and above Basel-III norms.
On state-owned banks securing Rs 1.1 lakh cr (of the required Rs 1.8 lakh cr) from markets, RBI Deputy Governor R Gandhi said there was enough appetite in the markets for that, adding the government would decide on selling stake in these lenders.
The statement from the department said, "Improved valuations, coupled with value unlocking from non-core assets and improvements in capital productivity, will enable PSBs to raise the remaining Rs 1,10,000 cr from the market. However, the government is committed to making extra budgetary provisions in FY18 and FY19 to ensure PSBs remain adequately capitalised to support economic growth."
Ananada Bahumik, senior director, India Ratings, said this provided clarity on government support to public sector banks. "Still, the government has to address structural issues such as governance reforms and improve recoveries in the case of bad loans. Till then, the government will have to infuse more capital than the estimated Rs 70,000 cr till March 2019."
Vibha Batra, co-head (financial sector ratings), ICRA, said the move provided space to improve the performance of these lenders through medium term, to enable them to raise equity capital from the market.
The press note from the department said, "We estimate PSBs' market valuations will improve significantly due to far-reaching governance reforms; tight NPA (non-performing asset) management and risk controls and significant operating improvements."
Earlier, RBI's Gandhi had said capital planning for public sector lenders should be based on a long-term horizon.
Recently, he had said it was reported the Centre was considering scaling down its stake in state-owned banks to 52 per cent. That, however, might not be enough to fully meet the capital needs of these banks under Basel-III norms, especially as the projections were based on minimum requirements, he added.
"Public sector banks play an important role in the economy of India. Of late, because of a variety of legacy issues, including the delay caused in various approvals and land acquisition, and also because of low global and domestic demand, many large projects are strained," said the finance ministry statement.
It presumed the emphasis on funds for these lenders would decline through the years due to the development of a vibrant corporate debt market and greater participation of private sector banks.