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After infusing over Rs 3.6 trillion in public sector banks since 2014, the government has not earmarked any capital for these banks in this year’s budget.
According to rating agencies, the government’s decision to not earmark any funds for recapitalisation of public sector banks in this year’s union budget reflects confidence in the capital position of such banks as well as their ability to raise funds from the market.
Rating agencies said that it is highly unlikely that the government will infuse any further capital in the state-run banks, given the incremental requirement of capital by such banks was limited due to better profitability in FY21, capital raising from markets in FY22, rollover of additional tier-1 (AT-1) bonds for call option in FY22.
According to Reserve Bank of India (RBI) data the union government has infused Rs 3.43 trillion in the state-run banks between 2014 and 2021, and another Rs 15,000 crore provision for FY22 was made.
The economic survey of 2021-22 noted that the capital to risk-weighted asset ratio (CRAR) of scheduled commercial banks increased from 15.84 per cent in September 2020 to 16.54 per cent in September 2021 on account of its improvement for both public and private sector banks.
Referring to absence of provision in the budget for recapitalisation of public sector banks, Partha Pratim Sengupta, managing director and chief executive, Indian Overseas Bank said the aim is to raise funds on one’s own strength. Bank’s capital adequacy is strong and has not asked for capital support from the government. “The focus is enhancing the strength of the balance sheet,” Sengupta said.
Based on the capital position as on September 30, 2021, all public sector and private sector banks maintained the capital conservation buffer well over 2.5 per cent, the survey said.
Anil Gupta, Vice President & Sector Head-Financial Sector Ratings, Icra said, “Not only has the government not budgeted any capital infusion for public sector banks for FY23, they have also reduced the capital infusion they had budgeted in last year’s budget from Rs 20,000 crore to Rs 15,000 crore. This shows the government is fairly confident that the state-owned banks are well placed when it comes to capital this year because they have turned profitable and are in a position to fund their growth”.
Further, he said, the security receipts that the National Asset Reconstruction Company Limited (NARCL) will issue to the banks for transfer of bad assets, which have been fully provided for, will also boost the capital of such banks. So, in a way, this is an indirect capital infusion by the government into the banks.
Last year, the union government had given approval for guarantees worth Rs 36,000 crore to back security receipts issued by NARCL. The proposed bad bank is expected to acquire the identified stressed assets from the banking sector on a 15:85 structure, wherein it will pay 15 per cent of the sale value through cash and issue security receipts for the remaining 85 per cent. These SRs will be issued in favour of the transferring lenders.
According to Prakash Agarwal, Director & Head Financial Institutions, India Ratings and Research, public sector banks are probably in the best shape in recent decades with strong balance sheets to adequately cater to credit demand that could come from the economy.
“The asset quality on bulk advances has strengthened considerably as they have been focusing on stepping up provision, cleaning up loan portfolios and growing mostly in better credits over the last few years, while close to 3 trillion of capital infusion over the last few years together with return to profitability has boosted capital buffers substantially. Further improved performance of some of the PSU banks also places them in a better position to raise equity outside of the government”, Agarwal said.
Krishnan Sitaraman, Senior Director & Deputy Chief Ratings Officer, CRISIL Ratings said, “In the past when the [public sector] banks were making losses due to asset quality challenges and their capital was getting eroded, the government had supported them by infusing capital. The situation has turned a full circle now as the banks are making profits and their capital is getting augmented through internal accruals”
“The current capital position of these is expected to support the credit growth levels that we are seeing for the short term as we are not expecting to see any material asset quality challenges. But if there is deterioration in asset quality impacting capital position and consequently an inability to meet regulatory minimum requirements, then we expect the government to step in and support them”, he said.
Credit growth has been declining since 2019 but it seems the tide has turned. Credit growth has picked up sharply in December which registered 9.2 per cent growth year-on-year. Experts are of the opinion that the state-owned banks have enough fuel in the tank to support the credit growth.d
