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The Financial Stability Report (FSR) points out the disconnect between the image of public sector banks (PSBs) as being stable but the return on valuations remaining low despite the image they command.
“In terms of public perception PSBs, with implicit government support, are considered relatively immune to destabilising impacts, though it has an efficiency imperative when judged by their returns on asset or capital employed. However, the same sense of safety eludes PSBs when it comes to their valuations. With the government thinking of new performance-based norms for capital infusion, this disconnect is sought to be addressed,” said the report.
The government has decided to infuse capital based on efficiency parameters in select banks. It is believed that owing to low valuations and high levels of non-performing assets (NPAs), the remaining banks will find it difficult to raise capital from the market. The government has decided to infuse Rs 19,000 crore into banks this financial year.
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RBI Governor Raghuram Rajan has also raised concerns over the rising asset quality woes and declining capital adequacy ratio of PSBs. “In this context the continued stress on asset quality of PSBs and consequent pressure on capital adequacy is a matter of increasing concern,” he said in the foreword in FSR report.
The capital adequacy ratio of some PSBs have also been under pressure, making the need to raise capital more urgent. The report also pointed out that the state-run banks continued to record the lowest capital to risk-weighted assets ratio (CRAR) among the bank groups.
“The decline in their (PSBs') soundness (measured in terms of CRAR) by 1.8 percentage points between March 2011 and March 2015 was the maximum, followed by foreign banks at 1.5 percentage points and PVBs (private banks) at 1.1 percentage points,” the report said.
Even on asset quality, PSBs have been under more pressure as compared with private peers. According to the report, PSBs recorded the highest level of stressed assets at 13.5 per cent of total advances as of March 2015, compared with 4.6 per cent in the case of private banks. In the same time, the net NPA ratio of PSBs increased from 3.1 per cent to 3.2 per cent; in the case of private banks, it increased from 0.8 per cent to 0.9 per cent.
The report also stressed that the performance of PSBs will remain crucial with the entry of the new banks in the system. The Reserve Bank of India is in the process of issuing licences for small and payments banks.
“In terms of public perception PSBs, with implicit government support, are considered relatively immune to destabilising impacts, though it has an efficiency imperative when judged by their returns on asset or capital employed. However, the same sense of safety eludes PSBs when it comes to their valuations. With the government thinking of new performance-based norms for capital infusion, this disconnect is sought to be addressed,” said the report.
The government has decided to infuse capital based on efficiency parameters in select banks. It is believed that owing to low valuations and high levels of non-performing assets (NPAs), the remaining banks will find it difficult to raise capital from the market. The government has decided to infuse Rs 19,000 crore into banks this financial year.
ALSO READ: Banks stare at Rs 53,000-cr electricity boards NPA on July 1
RBI Governor Raghuram Rajan has also raised concerns over the rising asset quality woes and declining capital adequacy ratio of PSBs. “In this context the continued stress on asset quality of PSBs and consequent pressure on capital adequacy is a matter of increasing concern,” he said in the foreword in FSR report.
The capital adequacy ratio of some PSBs have also been under pressure, making the need to raise capital more urgent. The report also pointed out that the state-run banks continued to record the lowest capital to risk-weighted assets ratio (CRAR) among the bank groups.
“The decline in their (PSBs') soundness (measured in terms of CRAR) by 1.8 percentage points between March 2011 and March 2015 was the maximum, followed by foreign banks at 1.5 percentage points and PVBs (private banks) at 1.1 percentage points,” the report said.
Even on asset quality, PSBs have been under more pressure as compared with private peers. According to the report, PSBs recorded the highest level of stressed assets at 13.5 per cent of total advances as of March 2015, compared with 4.6 per cent in the case of private banks. In the same time, the net NPA ratio of PSBs increased from 3.1 per cent to 3.2 per cent; in the case of private banks, it increased from 0.8 per cent to 0.9 per cent.
The report also stressed that the performance of PSBs will remain crucial with the entry of the new banks in the system. The Reserve Bank of India is in the process of issuing licences for small and payments banks.
