PSU banks may have to wait longer to be fully recapitalised

The Budget, while giving banks nothing much to cheer about, has dealt a particularly hard blow to public sector lenders. For them, the much-awaited ‘recapitalisation’ turned out to be a damp squib.

The Budget has earmarked only Rs 14,000 crore for infusing capital into these banks this year (in 2012-13, the number was Rs 12,000 crore). But according to Reserve Bank of India (RBI) estimates, the Government will have to infuse additional capital of Rs 90,000 crore into these banks over the next five years. The markets expected at least Rs 18,000 crore this year. The capital adequacy ratio of PSU banks as of December 2012 was 12.2 per cent, just about meeting the RBI’s comfort level of 12 per cent. With bad loans on the rise and higher provisioning cutting into internal accruals, capital infusion is crucial.

From the bank’s perspective, it is also worrying that the budget has asked them to lend more to agriculture – Rs 7 lakh crore now, up from Rs 5.75 lakh crore in the previous budget. This again would be negative for all PSU banks already weighed down by loan quality concerns in agriculture. Punjab National Bank, Bank of India, Bank of Baroda, and State Bank of India already have an exposure of more than 12 per cent to the agricultural sector. The Bank Nifty was down 3.7 per cent while the PSU bank Index was down 5.6 per cent. Among the top losers were SBI, PNB, Bank of India, Bank of Baroda and Union Bank, all of which were down three to five per cent. The Government will continue with the additional three per cent interest subvention scheme for farmers and extend it to private banks too.

Under the existing interest subvention scheme, farmers get short-term crop loans at seven per cent interest. If the loan to the bank is promptly repaid, then the farmer’s effective rate of interest works out to four per cent, with the Government bearing the extra interest.

Now, the Government has brought about a level playing field between private and public sector banks by asking the latter to join this subvention scheme too.

Private banks will now be able to meet their lending targets in the priority sector by offering the concessional interest rates to agriculture as well.

Under priority sector norms, banks need to lend 40 per cent of their Adjusted Net Bank Credit to the priority sector. Agriculture and micro and small enterprises (MSE) are two major sectors that receive priority sector lending apart from education and housing.

However some private banks reacted negatively to the interest subvention scheme, perhaps in a knee jerk reaction.

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