Money & Banking

PSU banks to benefit from capital infusion

M. V. S. Santosh Kuamr | Updated on February 17, 2011 Published on February 17, 2011

The Government has approved capital infusion in 10 public sector banks by way of preferential equity allotment. While additional capital infusion may be in store in the Budget, public sector banks such as Andhra Bank, Allahabad Bank, Corporation Bank and Dena Bank will benefit more.

Over the two years ended December 2010, the credit growth of public sector banks stood at 17 per cent and 24 per cent and internal accruals may not be sufficient to support higher credit growth. The improving capital adequacy despite being earnings-dilutive may improve the margins (lower the leverage, lower the interest cost) and thereby contribute to profitability.

While the number of banks getting the preferential capital infusion is high, the capital outlay per bank is not steep, given that the outlay is expected to be Rs 6,000 crore. As against this, the Government had infused Rs 3,100 crore in IDBI Bank in July 2010, and around Rs 2,000 crore infusion is expected in Central Bank by way of rights issue.

The capital infusion of Rs 6,000 crore is in addition to the Rs 15,000 crore capital infusion the Government budgeted for fiscal 2011.

Healthy receipts from one-time 3G and broadband spectrum auctions may have prompted the Government to plough additional capital into the banking sector with follow-through benefits expected to flow to other sectors. Most banks that will receive the additional capital infusion fall in the mid-size category among PSUs.

With capital infusion of the public sector banks, especially in the ones where its stake is close to 51 per cent, the Government has served two purposes. One, the Government stake will go up, increasing the headroom for these banks to raise more capital, going forward.

For instance, in the case of Dena Bank, capital infusion at current prices may improve the Government's stake by as much as 8 percentage points to 59 per cent.

Secondly, it will fuel banks' credit growth given the multiplier effect capital has on credit growth.

As of March 2010, the capital adequacy ratio of public sector banks was 13.3 per cent, far below the 17.4 per cent of private banks. By September 2010, public sector banks managed to maintain their capital adequacy at similar levels, thanks to some capital infusion. However, the core capital continued to be low at 8 per cent.

With this capital infusion and other upcoming capital raising by banks, the near-term capital requirements at least will be taken care of. Almost all public sector banks are getting capital in some way or another.

While State Bank of India, its associate banks and Central Bank of India are coming up with rights issues, Canara Bank, Indian Bank, and Bank of India are among the banks which may take FPO/QIP routes to raise funds.

It is to be noted that while the Government is infusing capital in banks, it is also getting back returns in the form of dividends. Dividends paid by listed banks to the Government works out to approximately Rs 4,238 crore for the fiscal year ended March 2010.

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Published on February 17, 2011
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