Santa seems to have arrived early for PSU banks, as the government announced plans to pump in extra capital to get them back on a sound footing.
The story would have had a happy ending. But the big picture is not that rosy. Looks like, this round of infusion will not be the be-all and end-all for the PSU lenders and capital support from the government is going to be never-ending affair.
So feels former Planning Commission member Pronab Sen. He said one has to live with it. "Eventually, as the economy grows and if the PSBs are supposed to grow along with it, they would not just need capital, but equity capital, because one of the constraining factors is the promoter common equity. So, unless the government is willing to dilute its holdings in these banks, they are going to have to stump up money for shoring up equity further," Sen told ETNow.
On Thursday, the government said it would ramp up capital infusion in the PSBs to Rs 83,000 crore, taking the total to Rs 1.06 lakh crore for 2018-19.
Global financial major Citi on Friday said the government's funds infusion in public sector banks will not ensure growth for them. The brokerage in a note, however, said it would ensure that they remain solvent and some banks might come out of the prompt corrective action (PCA) framework.
“Yet, there may not be enough capital left for growth after providing for non-performing assets as NPA levels remain high," Citi said, adding that SBI and Bank of Baroda looked adequately capitalised for growth.
Finance Minister Arun Jaitley sounded confident that the move would be a shot in the arm for the PSBs and enable them to exit RBI's PCA regime. The capital is going to flow in over the next few months.
Prompt corrective guidelines are a set of rules that impose operational constraints on banks high on bad loans, which in turn affects bank credit.
Mythili Bhusnurmath, Consulting Editor, ETNow, termed the government latest move for funds infusion as a case of "too little, too late".
"If only this government had done the recapitalisation early into its tenure, we really would not have reached the kind of impasse we are in today, where public sector banks are almost virtually freezing their lending… Right now, it is not going to make too much of a difference… It really is the case of a missed opportunity," said Bhusnurmath.
The government fund infusion will have four express objectives:
1) To help banks meet regulatory capital norms
2) Enable better performing PCA banks to get capital
3) Infuse funds into non-PCA banks that are closer to the red line and
4) Give regulatory and growth capital to banks that are being amalgamated.
Jaitley told reporters on Thursday that out of the Rs 2.11 lakh crore fund infusion announced for PSU banks earlier for FY18 and FY19, nearly Rs 42,000 crore is yet to be deployed.
Banking Secretary Rajeev Kumar said 4-5 banks stand to benefit the most and would come out of RBI's PCA framework in 2018-19.
Bhusnurmath sounded a note of caution. "Recap bonds only burden the fisc… Clearly, the government was ill-advised and that is why it did not do the recapitalisation earlier, and particularly, since recap bonds have been tried and tested in the past, it really defies understanding. A little bit of give and take both from the government and RBI would have been very welcome," she pointed out.
About the speculation swirling around any possible relaxation in the PCA guidelines, Sen said much would depend on how the additional recapitalisation funds are distributed among the banks. A selective approach might help here, he said.
"One of the reasons why the demand for relaxation of PCA norms is being made was the simple fact that a number of banks are not meeting the norms. With Rs 41,000 crore, you are not going to get all of them over. So, you probably would have to be selective," Sen told ETNow.