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Considering the mess that PSU banks are in, it’s surprising that the Finance Minister has allocated a mere Rs 25,000 crore for recapitalising them. This amount may not even be enough to compensate for the quarterly losses of state-owned banks.
Gross non-performing assets (NPAs) have risen from Rs 2.67 lakh crore at the end of March 2015 to a staggering Rs 3.6 lakh crore by December - an increase of almost Rs 1 lakh crore in a mere three quarters. Bank of India Punjab and National Bank's gross NPAs rose to Rs 32,995 crore in December 2015, up from Rs 20,245 crore in March 2015, while for Bank of Baroda the comparable numbers are Rs 27,354 crore and Rs 13,921 crore.
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In fact a Business Standard analysis of 19 state-owned banks had revealed that the solvency ratio (ratio of a bank's net NPA to its net worth) had edged up to 45.3% at the end of the third quarter, from 35.8% at the end of the first quarter.
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What this means is that 45.3% of the net worth of these PSU banks would be wiped off if they had to provide for these bad loans. With most banks under-provisioning for the bad loans, the amount allocated is simply not enough to meet their capital requirements.
If history is any guide, the amount budgeted will be wiped off by even the quarterly losses of PSU banks. Last year the government had infused roughly Rs 2,000 crore of capital into Indian Overseas Bank (IOB). But with the bank reporting losses of Rs 550 crore and Rs 1,425 crore in the second quarter and third quarters, respectively, the capital infused barely managed to cover the losses.
It could be argued that while banks may be under-provisioning for the bad loans, the finance minister is also following in their footsteps.
But it is possible that given the huge disparity between what the finance minister has set aside against the massive clean-up is required, the minister may be looking at the RBI to dip into its reserves to fund the banks in line with the suggestion mooted in the economic survey.
