Govt equity infusion in PSBs though positive is inadequate: ICRA

Bankers frustrated over big chunk for loss making banks

Describing the government's Rs 22,915 crore equity infusion in state-owned banks as positive, rating agencies ICRA and Fitch said the capital requirements are much higher as internal generation will be limited due to high credit costs.

Public sector bank executives flagged issue of large amount of capital going to banks who reported huge losses and bad loans (like Bank of India and Indian Overseas bank). This raises questions over rewarding performance and linking it to capital decisions.

Chief executive of Mumbai-based public sector bank said Meeting capital requirement under Basel III norms has been overriding concern. This is hardly money for growth. The performance criterion has played very little role. "What is the signal for those managing business prudently?" he asked.

ICRA in its notes said the frontloading of the capital infusion for FY2017 is positive and will immediately support the PSBs capitalisation levels. However, on an overall basis, the PSBs Tier 1 capital requirements to be in the range of Rs 40,000-50,000 crore for FY2017, which is higher than Government of India's current allocation of Rs 22,900 crore equity infusion.

The shortfall in allocation could continue to impact the PSB's loan book growth in FY2017 as the possibility of large quantum of capital raising from non-government sources remain limited as of now. PSBs internal capital generation is likely to remain muted on the back of significant pressure on their asset quality, it said.

Meanwhile, another rating agency Fitch said government's decision is supportive of the credit profiles of these lenders. But, this step is unlikely to address the pressures on the system driven by economic growth as banks face significant asset quality pressures and prospects of weak profitability.

Indian banks will need $ 90bn in total additional capital - most of which will be accounted for by the public banks - to meet Basel III requirements by 2019. The pressures on PSB credit profiles will remain, and more capital than the Rs 70,000 crore ($ 10.4bn) earmarked through to FYE19 will be needed from the government. This is required to restore market confidence and position the sector for long-term growth.

Losses at PSBs in the second half of FY16 were double the government's capital injection in that year, and eroded the equivalent of nearly 15% of end-FY15 capital. This caused loan-book contraction at many public banks, which brought sector-wide credit growth to below 10% in FYE16, the lowest increase in a decade, Fitch added.