PNB and Rotomac scams to offset gains from bank recapitalisation

Additional funds may required for Union Bank and Allahabad Bank

Exposure to recent instances of fraud at Punjab National Bank (PNB) and Rotomac may offset gains from the government’s capital infusion programme for Union Bank of India and Allahabad Bank. The two public sector banks (PSBs) are reeling from high non-performing assets (NPAs).

Union Bank has a total exposure of Rs 24 billion in the two fraud cases, while the figure for Allahabad Bank is pegged at Rs 27 billion.

Recapitalisation funds might prove to be insufficient, as the exposure will consume over 50 per cent of the funds allotted to Union Bank. For Allahabad Bank, the exposure is about twice the allotted recapitalisation funds.

The banks will need to make 100 per cent provisioning until liability is fixed (amount recovered), dragging their profits and net worth down. Even after including recapitalisation funds, their net worth will be negative if their respective net NPAs and exposure amounts are to be fully provided for.

Though the new NPA rules are seen in a positive light, these will impose an additional provisioning burden on banks for a few quarters. The rules mandate banks to refer accounts in default under the Insolvency and Bankruptcy Code if resolution is not implemented, and make higher provisioning (50 per cent).

According to analysts, the two PSBs still have a quantum of loans under various restructured schemes, indicating potential of incremental bad loans and provisioning in the coming quarters.  Higher impaired assets and provisioning warrant additional capital requirements.

Pritesh Bumb, analyst at Prabhudas Lilladher said, “Due to new NPA rules and high fraud-related provisions, the allotted recapitalisation funds will not be sufficient and more capital infusion will be needed for these two banks.”

“The recapitalisation funds will not be sufficient and there should not be any additional budgetary support as the hard-earned money of the people should not be used to meet the expenses,” said G Chokkalingam, founder and managing director, Equinomics Research & Advisory.

If the government does not pump in additional funds, the future performance of the two banks could be hit. Against this backdrop, even as their share prices are down substantially, investors should not buy the stocks.