Public sector banks in a fix over selective capital infusion

Wants govt to allow them to tap markets; Govt stake in many banks over 70%

The government’s decision to infuse capital in public sector banks (PSBs) selectively seem to have caught bankers off-guard. Banks that have not received capital, which is essential for growth and provisioning for stressed assets, are in a quandary.

Government stake in some of the 12 banks that were denied fresh capital ranges between 65 per cent and 80 per cent. With the government agreeing to bring down its stake to 52 per cent, there is headroom for banks to dilute stake. Some banks have taken board approval for raising capital from the market.

“The government has to take a view on how public sector banks should infuse capital. If they are not allocating capital for us, then there is no other option but to tap the market,” said a senior executive with a PSB. Some PSBs are planning to write to the government, requesting for capital infusion once again.

However, the government is not in a hurry to dilute stake as valuations of most PSBs remain subdued despite the current bull-run in the equity markets. For example, UCO Bank, Indian Overseas Bank and Dena Bank’s share prices have grown less than 10 per cent in past year.

Most PSBs have seen less than 50 per cent appreciation of their scrip in the past year. In contrast, for private sector lenders such as ICICI Bank and HDFC Bank, the growth was much higher. “It is our responsibility to ensure that if we are going to dilute our stake, it is done at an appropriate valuation,” Jayant Sinha, minister of state for finance, had said in January.

State Bank of India is in the process of tapping the capital markets, but other banks are yet to announce their plans. The government allocated capital to only nine PSBs that showed better efficiency in recent years.

Two parameters were taken into consideration for the selection and the allocation of capital. First, weighted average of return on assets of all PSBs for last three years, and those who are above average were considered. The second parameter was return on equity for the last financial year. The government said last week that nine PSBs would get about Rs 7,000 crore of capital, though Rs 11,200 crore was allocated for capitalisation in the interim Budget presented by the previous government last year.

Sharp deterioration in asset quality over the past few years have dented profitability of PSBs more than their private sector peers. The proportion of restructured advances is also much higher for government banks.

“Capital raising efforts by PSBs other than the capital infusion by the government, face challenges because of their relatively low equity valuations compared to their private sector peers,” Reserve Bank of India said in its latest Financial Stability Report.

“The ultimate improvement in valuations can only come from commensurate improvements in asset quality, governance structures and operational efficiency,” it added

According to RBI data, stressed advances (non-performing assets plus standard restructured advances) of the banking system increased to 10.7 per cent of the total advances from 10.0 per cent between March and September 2014. “PSBs continued to record the highest level of stressed advances at 12.9 per cent of their total advances in September 2014, followed by private sector banks at 4.4 per cent,” RBI had said. Banks are expected to remain under pressure on the capital front due to additional requirements towards the capital conservation buffer, the counter-cyclical capital buffer and supervisory capital, apart from supporting business growth.

Since RBI will withdraw its forbearance of lower provisioning for debt recast from next financial year, banks will need to set aside higher capital for restructuring advances.

From April 1, banks have to make higher provisions for standard restructured advances in line with non-performing asset provisioning which is 15-20 per cent, compared to five per cent now.