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The change
Public sector banks that have seen no let up in asset quality pressure over the past year now have to fend for themselves, going by the measly Rs 10,000 crore that the Centre has committed to infuse into these banks in 2017-18. Considering that the profit for all PSBs put together shrunk by 60 per cent in the first half of this fiscal, and more pain is expected in the coming quarters, the sum set aside by the Centre, will hardly meet their capital requirements. The silver lining though is that the Finance Minister has assured additional infusion where needed. In the 2015-16 Budget, the Centre had laid out a meagre Rs 7,000 crore for capitalisation, which it revised during the latter part of the fiscal and infused an additional Rs 20,000 crore into PSBs, given the sharp increase in bad loans and their weak capital position.
The Budget has also offered only a modest tax concession on the bad loan provisioning. This will offer only a marginal relief to PSU Banks.
The background
In the last five years, the Centre has infused about Rs 89,000 crore (2012-2017) into PSBs. But inspite of the Centre’s largesse, PSU banks have seen a consistent fall in earnings owing to weak credit growth, stressed margins and a sharp rise in bad loan provisioning. The overall loan growth for all PSU Banks put together was a meagre 4 per cent in 2015-16, even as the Centre infused around Rs 20,000 crore during the year. Hence, the Centre’s infusion, has funded banks’ losses on account of rise in bad loan provisioning rather than growth. The trend is likely to continue as the loan growth for PSBs, in particular continues to slip.
The Centre has stuck to the Rs 70,000 crore capital infusion between 2015-16 and 2018-19 proposed under the Indradhanush plan. But this is grossly inadequate, given the persisting concerns on asset quality and weak credit growth.
Bankers have been making a pitch for a 100 per cent deduction on bad debt provisioning. But the Finance Minister has only tinkered with the existing provisions to offer a small respite to banks. From the existing 7.5 per cent of income (essentially operating income after some adjustments), banks can now claim deduction on bad loan provisions upto 8.5 per cent of income.
The verdict
In the near term, banks such as UCO, Union Bank, Central Bank of India, IOB, Syndicate Bank, Dena, Bank of Maharashtra, IDBI Bank, United Bank and Allahabad Bank, may be impacted because of the Centre’s tight fistedness regarding capital infusion. These banks have relatively lower capital buffer and high stock of bad loans.
The increase in cap on claiming deduction on bad loan provisioning, will not offer significant relief to PSU banks’ earnings. For most of them bad loan provisioning formed 90 per cent to over 100 per cent of their operating profit in 2015-16. Hence they will only see a token relief.
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