However sectoral analysts are of the view that the quantum of capital infusion will provide some stability to the weak financial profiles of state-owned banks but may not go a long way to help them achieve growth.
The largest amount of Rs 7,575 crore was earmarked for the country’s largest lender, the State Bank of India.
“In line with the announcements made under ‘Indradhanush’ and the Union Budget, the government has undertaken an exercise to assess the capitalisation needs of public sector banks during 2016-17,” a ministry statement said.
“The capital infusion exercise for the current year is based on an assessment of need as calculated from the compounded annual growth rate of credit for the last five years, banks’ projections of credit growth and an objective assessment of the growth potential of each public sector bank.”
Following this assessment, 75 per cent of the amount collected for each bank is being released now to provide liquidity support for lending operations as also to enable banks to raise funds from the market, it said.
The remaining amount, to be released later, is linked to performance, with particular reference to greater efficiency, growth of both credit and deposits and reduction in the cost of operations, it added.
Among others, Indian Overseas Bank will get Rs 3,101 crore, Punjab National Bank Rs 2,816 crore, Bank of India Rs 1,784 crore, Central Bank of India Rs 1,729 crore and Syndicate Bank Rs 1,034 crore.
In his response, Saswata Guha, director, Financial Institutions at global credit rating agency Fitch Ratings, told IANS: “What the government is providing banks currently is simply part of the amount it had budgeted for. It will provide some stability to the weak financial profiles of state-owned banks but may not go a long way if banks have to pursue decent growth in a scenario where some more amount of asset quality stress is yet to filter through.”
“In our estimate, the government will likely have to provide at least double of its budgeted $11-12 billion to state-owned banks but there is also a risk that this could go up if the government banks are unable to raise their share of capital (in various forms) independently from the capital markets,” he added.
In a recent report, Fitch Ratings had said it expects Indian banks to require around $90 billion of capital to meet new Basel III capital standards that will be fully implemented by the financial year 2018-19.
Resolving the asset quality and capital issues will be important for some banks to regain market access, which is now difficult for the majority of state banks, it had said.
Fitch Ratings said it expects Indian banks’ stressed asset ratio to peak around 2016-17, although the recovery will depend on resolution of non-performing loans (with state banks having average stressed asset ratio of 14.5 per cent compared to 4.5 per cent for the private banks) and credit growth.
The ‘Indradhanush’ scheme was announced on the eve of the Independence Day in 2015, covering seven areas – appointments, setting up of a Bank Board Bureau, capitalisation of banks, de-stressing their assets, empowerment, accountability and governance reforms.
The preparations for the first tranche of capital infusion for this fiscal began soon after the state-run banks made presentations to the Finance Ministry on their balance sheets, especially the extent of stressed assets and measures being taken to recover them, officials said.
In his Budget speech this year, Finance Minister Arun Jaitley said that while the problem of stressed assets and bad loans was a “legacy of the past”, the structural issues were already being addressed, and promised adequate infusion of funds, to the tune of Rs 25,000 crore.
“If additional capital is required by these banks, we will find the resources for doing so,” he added.
In fact, in anticipation of such capital infusion, as also because of the steps being taken by the banks to tackle the debt issue, banking stocks have been on the rise in recent weeks.
Since June 1, the banking index of the Bombay Stock Exchange, in fact, has risen nearly 10 per cent. Some stocks, like those of Punjab National Bank, have flared up by over 50 per cent during the period.