India Economy

Centre’s recapitalisation kitty may soon run dry

Radhika Merwin | Updated on July 27, 2018

The recent ₹11,300-crore infusion into five PSU banks is just a drop in the ocean

If you make a bad bargain, hug it all the tighter, said Abraham Lincoln famously. By pumping in taxpayers’ money year after year into public sector banks (PSBs), the Centre is probably hoping to live up to this maxim.

But given the sorry state of affairs at PSBs, the Centre’s bet may fail to pay off. As it stands — and comes as little surprise — the Centre’s big bank recap plan announced last year, entailing a massive infusion of ₹88,000 crore into PSBs, has fallen flat on its face. Not only has the magnanimity of the Centre proved inadequate, but it has also cost the Centre — the majority shareholder in PSBs — dear.

Even so, with few banks on the brink of breaching their capital requirement, the Centre has once again stepped in by releasing a sum of around ₹11,300 crore out of its recapitalisation kitty of ₹65,000 crore for the fiscal. The Centre may have warded off concerns for now. But given that the year has just begun and the NPA recognition cycle is yet to bottom out, the Centre’s petty infusion into five public sector banks is just a drop in the ocean.

In all likelihood, the Centre will have to increase its recapitalisation corpus. It will also have to tread with caution and allocate funds on an absolute ‘need’ basis, rather than play the ‘come one come all’ theatrics it did last year.




When the Centre first announced its massive recapitalisation plan last year, there was an incredible spirit of optimism. And why not? In the three fiscals preceding FY18, the Centre had infused altogether ₹50,000-odd crore into PSBs. Pumping in over ₹80,000 crore in a single year ought to have eased up the enduring issue of capital within PSBs.

But large haircuts and steep provisioning have eaten into banks’ earnings.

Numbers reveal that between September 2017 quarter and the March 2018 quarter, Tier I capital for weaker PSU Banks (placed under the RBI’s prompt corrective action (PCA)) has shrunk by 9 per cent. Hence, despite a near 8 per cent fall in risk-weighted assets (RWA) during this period — the lowering of risky assets should have eased up banks’ capital — banks have reported a sharp fall in their Tier I capital ratios.

More in the queue

The recent infusion does little to abate concerns over the state of affairs of banks. While banks have taken a one-time hit of the RBI’s February circular (that forced banks to accelerate the NPA recognition exercise) in the March quarter, there could be more pain ahead. Banks have to report even one-day defaults hereon and draw up resolution plans within 180 days. This could result in a sharp rise in provisioning in the coming quarters.

This implies that the Centre will have to substantially revise its recap plan for the fiscal.

For one, going by the March quarter numbers alone, there are still a few banks that appear to be in dire need of funds. Central Bank of India, for instance, had a Tier 1 capital ratio of just 7 per cent as of March 2018, and has not been considered in the first round of funding. IDBI Bank, fortunately for the Centre, appears to have lined up another knight in shining armour. But that aside, there could be others in the queue, if NPAs continue to rise sharply.

Two, with few of the so-called stronger banks also likely to come under PCA this year, the funding requirements are bound to go up substantially. PNB and Andhra Bank, that were among the five PSBs recently selected for the first round of funding, were bucketed in the non-PCA category last year.

Three, a pick-up in credit growth will only compound the issue. Until now, despite banks consolidating their loan book and reducing exposure to risky assets, they are short of capital. IDBI Bank, Bank of India, UCO Bank, Central Bank of India, IOB, OBC, Dena Bank, United Bank and Corporation Bank had seen 5-10 per cent fall in RWA between September 2017 quarter and March 2018 quarter.

A back-of-the-envelop calculation suggests at least an additional ₹40,000 crore of recap (above the budgeted ₹65,000 crore), if NPAs continue to mount. ICRA estimates the total capital requirement at ₹1,18,900 crore for FY19, under a worst-case scenario, which assumes a higher RWA base and higher loss case, where weak PSBs meet their 7 per cent Tier 1 capital norm.

Need for caution

The Centre infusing capital into PSU Banks is not a new phenomenon. But the sheer size of the recap this time calls for greater caution. Rather than front-load capital infusion, the Centre will have to address capital needs on a case-to-case basis. Some of the stronger banks will have to fend for themselves.

Others will have to monetise their non-core assets. Above all, unless the Centre hastens governance reforms, throwing good money every year into ailing PSBs may achieve little.

Published on July 22, 2018

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