The government is likely to invest an additional Rs.11,000 crore in state-owned banks in the current financial year, providing some respite to these lenders that need much more capital to meet globally agreed upon capital adequacy norms, and some of which are battling a high level of bad debts.
This will be in addition to a provision of Rs.7,940 crore that has been already made in this year’s budget for capitalizing state-run banks.
The government’s rethink on capitalizing state-run banks comes after most of them sought more capital from the government—their majority stakeholder.
The Reserve Bank of India (RBI) also raised concerns about the inadequate capitalization of these banks.
“What we are aiming at is an infusion of about $3 billion (around Rs.19,000 crore) this year and around double of that next fiscal year. We can always seek additional funds through supplementary demand for grants,” said Rajiv Mehrishi, finance secretary, in an interview to CNBC-TV18.
Much more will be needed.
In a 12 May report, rating agency Crisil Ltd estimated that state- run banks will need Rs.2.6 trillion up to March 2019 to meet capital requirements under Basel III norms. The deadline for meeting these norms is 31 March 2019. The Third Basel Accord (or Basel III) is a global framework on capital adequacy of banks that was agreed upon in 2010-11, and which was essentially a response to the financial crisis of 2008.
The Crisil report pointed out that these banks will find it difficult to raise funds from the market, given their muted profitability due to high level of bad debts and poor valuations. It also estimated that bad debts in the banking system are likely to increase to 4.5% by the end of the current fiscal from 4.3% in 2014-15. The non performing assets (or bad loans) on the books of state-run banks were higher at 5.2% in the quarter ended 31 March 2015.
In 2014-15, the government had infused only Rs.6,990 crore in 9 state-run banks based on efficiency parameters. Banks left out from the capitalization process protested. At the time, the government argued that it had allowed all banks to raise funds from the market by allowing them to bring down the government’s holding in them to 52%. Adverse market conditions and unfavourable valuations, given the high levels of bad debts in state-run banks, have made it difficult for these banks to raise funds from the market.
The additional investment comes in the context of the government expecting a better fiscal situation given high indirect tax collections. The finance ministry is currently in the process of ascertaining the capital requirements of state-run banks for the current financial year and has asked all banks to make presentations to the government on their capital requirements and the avenues they are exploring to raise capital, including selling off non-core businesses. The government’s move gives the banks more time to get their house in order by reducing the bad loans on their books, said an expert.
“Bad debts continue to remain on the books of state-run banks as attempts of sale of NPAs or revival has not been very successful. Many of the restructured loans are also slipping to bad debts,” said Shinjini Kumar, director at PricewaterhouseCoopers Pvt. Ltd.
“This capital infusion buys more time for the government as it does not want to see these banks go in for distress sales. If the economy revives, the banking sector will look up and the bad debt situation will improve. Banks can also then tap the market,” she added.
[“source – livemint.com”]