PNB SCAM FALLOUT. Govt’s ₹2.11-lakh crore bank recap plan may not be good enough

Shobha Roy Updated - February 20, 2018 at 10:47 PM.

PNB fraud has weakened investor sentiment and RBI’s revised norms on debt resolution entail higher provisioning, say experts

VELLORE, TAMIL NADU: 19/11/2016: A display of new Rs.2000 notes. Higher denomination notes will be difficult to change because of lower denominations like 500 has not arrived. Photo : C. Venkatachalapathy

The government’s ₹2.11-lakh crore recapitalisation programme, aimed at tackling bad debts and reviving credit growth for state-owned banks, may fall short of achieving its desired result due to the ₹11,500-crore fraud at PNB and revised norms on debt resolution.

The government has earmarked nearly ₹88,000 crore (out of ₹2.11-lakh crore) of capital to 20 state-run banks to be pumped in by March 2018.

According to industry experts, the capital calculation done by the government may fall short of the actual requirement of the banking industry in the wake of recent developments.

Reserve Bank of India recently came up with revised norms pertaining to resolution of stressed assets, devolving existing schemes, including corporate debt restructuring (CDR), strategic debt restructuring (SDR), scheme for sustainable structuring of stressed assets (S4A).

It requires lenders to initiate insolvency proceedings if resolution plans for large stressed accounts, where aggregate exposure is ₹2,000 crore and above, do not work out.

“While the RBI’s move will help improve credit discipline and lead to faster recognition of stressed assets, it will call for higher provisioning, thereby, exerting pressure on banks’ capital adequacy ratios,” Jaikishan J Parmar, Research Analyst, Angel Broking, told BusinessLine .

Tough to raise money

The PNB fraud has led to the weakening of market capitalisation of a number of Indian banks. Investors would not be willing to come forward to invest in these banks till there is some clarity on the extent of the fraud in the system, sources say.

PSBs, which were planning to raise funds from the market in Q4 of the current fiscal or thereafter may now find the avenue drying up.

This apart, banks, which were resorting to raise funds through the issuance of Additional Tier I (AT I) bonds may have to recall those bonds even before maturity, making it difficult for them to raise Tier I capital.

The RBI had recently asked banks put under Prompt Corrective Action (PCA) measures to recall or retire their high-cost AT I bonds even before maturity for fear of default.

AT-I bonds, also called perpetual bonds, are perceived as risky instruments as the issuing bank has the prerogative of skipping coupon payments in case they don’t have enough profits or have enough distributable reserves. These bonds have a call option usually after the end of the fifth or the tenth years.

“Under the current circumstances, banks cannot raise money through QIP or from market; some banks have also been asked to recall Additional Tier I bonds.

“This is a dire situation,” said Anil Gupta, Vice-President, Financial Sector Ratings, ICRA.

Banks which have been under PCA include Allahabad Bank, Bank of India, Central Bank of India, IDBI Bank, UCO Bank, Dena Bank, Oriental Bank of Commerce, Indian Overseas Bank, Bank of Maharashtra and Corporation Bank and Bank of India.

According to a senior official at a public sector bank, the burden of recapitalisation is likely to go up.

Published on February 20, 2018 16:45