The Government spelling out its intention to support public sector banks (PSBs) is the key positive takeaway from the Union Budget. Higher market borrowings and greater outlay for agricultural lending are the drags.

The Government has earmarked Rs 14,588 crore to bolster the net worth of public sector banks. As of March 2011, the capital adequacy ratio of public sector banks was 13.1 per cent, against the 12 per cent comfort level of the Reserve Bank of India.

The need for capital infusion arises because PSBs have taken a hit on their asset quality in the last three quarters. Higher provisioning for non-performing assets has led to lower internal accruals.

That said, according to banks' filings in stock exchanges, the Government and Life Insurance Corporation are already slated to infuse Rs 27,000 crore in banks this fiscal. Hence, capital infusion next fiscal is to further strengthen PSBs.

The capital infusion could be through preferential allotment of shares or rights issue. These infusions would allow banks to extend additional loans of upto Rs 1.8 lakh crore. Higher core equity would also improve the headroom to raise tier-2 capital (long-term debt).

As Indian banks are expected to migrate to Basel III norms, the capital infusion by the Government is expected to be a continuous exercise. With this regard the Government plans to set up a financial holding company. This holding company may raise resources to infuse capital into banks in future.

While capital infusion is a positive move for Indian banks, high Government borrowings may crowd out the private borrowing. Even as private borrowing is yet to take off, the Government has budgeted for Rs 4,79,000 crore of net borrowing this fiscal. This is a significant jump from current fiscal's budgeted borrowing of Rs 3.43 lakh crore and the revised borrowing of Rs 4.35 lakh crore this year.

Banks already hold 30 per cent of their deposits in Government securities against mandated 24 per cent. High supply of Government paper will put pressure on yields (leading to mark-to-market losses for banks). Excess investments in Government bonds will affect bank margins as well.

Agriculture credit target

With credit growth to agriculture moderating, the current year estimates of Rs 4.75 lakh crore will be just met. Therefore a 21 per cent jump in outlay for agriculture next fiscal is a tough ask for banks. Especially as the asset quality of agriculture loans has been under severe stress. Extension of interest subvention on agriculture loan may give some respite however this benefit is not available for private banks.

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