Govt may need to infuse about Rs 600 bn in PCA banks to shore capital base

While huge net NPAs leave nothing on the table, other capital-raising options are not easy currently, say experts

The markets celebrated when the government approved a capital infusion plan for weak banks last October. Especially, the share prices of those under the Reserve Bank’s (RBI’s) ‘prompt corrective action’ (PCA) ambit rose 15-34 (except for Dena Bank). Of the  ~2.1 trillion proposed, the government infused  ~900 billion in public sector banks (PSBs) during FY18; a little over 60 per cent was for PCA banks. 

However, with the recent developments in the sector, these efforts seem insufficient. The 11 PCA bank stocks have been under pressure.

Due to high provisioning for the RBI’s new rules on non-performing assets (NPAs or bad loans) and huge net NPAs, the capital position of banks under PCA is weak, impacting their loan book growth. To get the ball rolling, say experts, the government will have to infuse additional capital. “An additional ~500-600 billion,” thinks Karthik Srinivasan, head of financial sector ratings at ICRA.

PSBs, and mainly PCA banks, are already grappling with high NPAs. PCA banks, for instance, accounted for over 34 per cent of the total gross NPAs of all the listed banks (~10.25 trillion) as of March 2018. This data excludes unlisted banks (mainly foreign), having 6-7 per cent share. To add to the woes, the RBI’s new NPA framework further weighed on capital base due to additional slippages resulting in higher provisioning. In the March 2018 quarter, PCA banks posted an over two-fold year-on-year rise in provisions and contingencies (including mark-to-market provisions due to high bond yields) on an aggregate level. For March quarter, majority of PCA banks have seen their NPA ratio (as percentage of advances) rise as compared to the December 2017 quarter. Even after huge NPA provisioning, their aggregate net NPAs, as of March 2018, are 88 per cent of total capital under Basel-III, indicating ailing credit-loss-absorption capacity. 

It doesn’t end there. The banks would have to take an additional hit if the write-off ('haircut') on National Company Law Tribunal (NCLT) cases turn out to be more than the provisions made by banks.

In the March quarter, RBI enabled banks to temporarily restrict the added impact on capital by allowing banks to spread mark-to-market (revaluation of assets at current prices) provisions on the bond portfolio over four quarters and reducing the provision requirement on NCLT cases by 10 percentage points. But, it will surely dent capital in the coming quarters, say experts. Weak credit loss absorption capacity, in turn, weighs on banks’ loan book growth. As of end-March, PCA banks’ advances fell by 6.6 per cent on a cumulative basis. Barring two, all other PCA banks reported a decline in advances. Consequently, the share of these PCA banks in overall credit of scheduled commercial banks fell to around 18 per cent, from 21 per cent last year.

Government support is the only immediate remedy: There are options available for these banks to shore up the capital base, such as raising directly from the market and selling their non-core assets. But, with the current situation of PSBs, raising directly from market seems tough (given the subdued price-to-book value multiples) and the latter option is very time consuming, valuation being a major hurdle. Though the Centre is also considering merger of PSBs, this might take time. the only immediate way to strengthen capital is from the government’s pocket, say experts. In this backdrop, most of them believe that PCA bank stocks are better avoided.