Budget impact. Banks to fend for themselves

Bankers had requested the Finance Minister to relieve them of their Non-Performing Assets (NPAs) by buying out their bad loans. But the Finance Minister has chosen to grant them relief without taking on this burdensome liability. For one, he has addressed the asset-liability mismatches that banks face when lending to infrastructure, by opening up new sources for banks to raise long-term funds. Infrastructure is among the top five sectors that contribute significantly to the level of stressed advances.

Now, banks will be able to raise funds specifically for lending to infrastructure sector without regulatory requirements such as CRR, SLR and Priority Sector Lending targets. Currently, banks need to hold 22.5 per cent of their deposits in government securities as SLR. They also need to set aside 4 per cent of their deposits with the RBI as CRR. This money locked away with the RBI does not fetch any interest for banks. With these requirements gone, banks which are now reluctant to lend to the ailing infrastructure sector may be incentivised to do so. This will also help them address their asset liability mismatch. Two, the budget talks of a flexible 5/25 structure, where banks can, say, lend for a 25 year project, but structure it as a 5 year loan with an option to roll it over, thereafter.

The other burning issue for public sector banks was recapitalisation. The budget acknowledges the need to infuse capital of about Rs 2.4 lakh crore by 2018, but it has not spelled out the amount earmarked for 2014-15. In the interim budget, the government had earmarked Rs 11,300 crore of capital, much lower than the Rs 14,000 crore brought in during 2013-14.

But the budget has pointed out the way forward by promising to dilute its own stake in PSU banks. This is a big positive.

The government’s tacit directions to public sector banks on lending, has left minority shareholders short-changed in the past. Most of the public sector banks, trading well below their book value, have seen had capital infused by the government at abysmal valuations. This has eroded the book value of some public sector banks by as much as 50 per cent. The government’s current equity share in state-owned banks varies between 55 to 82 per cent. By paring its stake to a lower threshold, the government will be able to generate enough funds to take care of the needs of some of the larger banks.

This proposal will benefit banks such as Central Bank, United bank, Bank of Maharashtra, and Indian Bank where the government holds more than 80 per cent stake, where the capital needs are also high. For instance Central Bank has a tier I capital of 7.3 per cent (6.5 per cent norm) and very high stressed assets of 20 per cent. United Bank which has a tier I of 6.5 per cent has stressed assets to the tune of 17 per cent. At the same time, by not taking NPA portfolios off the banks’ hands and by insisting that they raise their own capital, the FM has signalled that the public sector banks will have to put their house in order and fend for themselves from now on.

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