Public sector banks to get more govt capital in H1FY20

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In February, the government had approved Rs 48, 239 crore in capital (via bonds) for a dozen PSBs.

Having infused around Rs 1.06 lakh crore in FY19, the government is unlikely to provide more capital to state-run banks in the first half of this fiscal, as they are well capitalised at the moment, sources said on Wednesday. Consolidation of public sector banks (PSBs), however, could dominate the reforms agenda in the current fiscal, subject to political clearance, they added.

“PSBs had already been adequately capitalised in FY19 and are now focusing on recoveries and external (non-government) sources of funding. The resolution of Essar Steel and Bhushan Power and Steel is going to yield much and will improve PSBs’ cash flow. So, there won’t be any requirement of further infusion in the next few months,” said one of the sources.

In February, the government had approved Rs 48, 239 crore in capital (via bonds) for a dozen PSBs, including Allahabad Bank, Corporation Bank and Punjab National Bank (PNB). In FY18, the infusion was to the tune of Rs 88,139 crore. The infusion this year shored up the capital base of weak PSBs and helped some of them get out of the prompt corrective action (PCA) framework of the central bank. The RBI has already removed Allahabad Bank, Corporation Bank, Bank of India and Bank of Maharashtra from its PCA framework. It had also lifted restrictions placed on Oriental Bank of Commerce, subject to certain conditions.

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Prior to the move, as many as 11 of the 21 PSBs were under the corrective regime.

However, despite massive infusion since 2014-15, the share of state-run banks in the market capitalisation of all banks has dropped sharply in the current NDA regime —from around 42% in 2014 to just around 26% until recently. Of course, without the government support, many of the bad loan-hit banks would have fallen short of meeting their regulatory capital requirement. However, this has intensified calls for privatising weak PSBs and not just getting LIC to bail out some of them (LIC recently completed acquisition of a 51% stake in IDBI Bank, saving the government the need to further capitalise the debt-laden lender last fiscal).

As for the next phase of consolidation in the public-sector banking space, there were speculations earlier that the government could weigh the possibility of amalgamating three more lenders — PNB, Oriental Bank of Commerce and Punjab & Sind Bank —although any such plan would have to be endorsed by an inter-ministerial group (formally called Alternative Mechanism). Also, given that PNB, OBC and Punjab & Sind Bank, while witnessing an improvement in their finances, are not out of the woods yet, the government may choose to wait until their recovery takes roots.

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However, the successful experience of merging State Bank of India with five of its subsidiaries and Bharatiya Mahila Bank, and the amalgamation of Bank of Baroda, Vijaya Bank and Dena bank have given the government confidence that another round of consolidation can be handled without any hiccups. Amalgamations in the banking space will be part of the government’s efforts to create a few but strong state-run lenders with much larger balance sheet to support the rising appetite for credit of the fast-growing economy.

The finance ministry believes the worst is over for state-run banks. Gross non-performing asset ratio in the banking system is expected to ease for the first time in almost a decade to 10.3% by the end of 2018-19 under the baseline scenario, from as much as 11.2% a year before, according to the latest RBI projection. This is mainly due to easing concerns about the NPAs of state-run banks that account for an overwhelmingly large share of these bad loans.

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