Public banks need much more than Rs 20,000 crore capital infusion

Government's plan to infuse Rs 20,000 crore into public sector banks puts no pressure on the Centre, but the lenders have to be ready with enough capital if matters go south

The government has sought approval from the parliament for Rs 20,000 crore capital for public sector banks (PSBs) via recapitalisation bonds. There will, however, be no additional burden on the government finances as bonds issued by the government will be subscribed by the banks first which, in turn, will come back to them from the government as capital. But the PSBs will require much more than Rs 20,000 crore considering worst-case scenarios.

Low capital levels

PSBs are not in a comfortable capital position. They have just the adequate levels of it. They need to maintain buffers to face any adverse situation due to COVID-19. In fact, private sector banks are well stocked with the new capital. Take, for instance, ICICI Bank, Axis Bank, Kotak Bank and IDFC First Bank etc have raised fresh capital post-COVID. Given the GDP contraction in 2020-21 and a likely low level of growth recovery in 2021-21, the PSBs have to keep higher capital level as the stress in the economy would eventually transmit to the banking sector, especially PSBs as they control two-third of the banking in India in terms of deposits and advances.

High NPAs from pre-COVID period

The banking sector has entered the COVID crisis with a high level of NPAs of over 8 per cent of their advances. At March-end, the gross NPAs were at 8.5 per cent. Such high levels of NPAs will continue to require capital as a lot will depend on their recovery. The resolution of NPAs through bankruptcy code is currently blocked as the IBC is suspended for a year. Besides, not many new buyers are there because of demand destruction. The new RBI restructuring of corporate as well as retail borrowers is available to only standard accounts at the time of the COVID lockdown in March this year. So, the assets already under stress with default will not get any reprieve so far as the restructuring is concerned.

Restructuring to lessen the burden for only two years

The new loan restructuring announced by the RBI will help only the COVID-impacted industries. The Kamath committee has also set strict rules for allowing the restructuring and resolution of COVID-related stressed accounts. But there are two big dangers. One, the current provisioning requirement is 10 per cent for the banks agreeing for a restructuring while 20 per cent for the ones not participating in the restructuring scheme. But the provisioning requirement will come back if the restructuring fails after two years.

Raising capital from the market

The PSBs will have to come to market to raise capital. The current valuations ae very low for PSBs with book to price ratio of less than 1. The private bank commands a price to book of over 2-3 times. The investors have concerns regarding the future book of PSBs as the NPA issue is getting postponed. The success of current merger or consolidation exercise is also awaited. The future NPAs are likely to come from MSMEs, agriculture and Mudra loans and also stressed accounts due to COVID-19.

Cost-cutting measures

The SBI has already taken a lead by announcing a VRS for its employees. Other PSBs should also follow suit by cutting costs by using technology. There could be sale of real estate, hiving off the non-core businesses and VRS etc.

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