Banks denied capital infusion from Centre likely to focus on retail loans

Public sector banks that have not received capital infusion from the Centre may go slow on corporate lending even if the tide in the economy turns favourable. Instead, to conserve capital, these banks may prefer giving retail loans such as home loans and loans against gold and silver ornaments, say bankers.

Retail loans are considered less riskier than corporate loans and, consequently, require lesser capital to be set aside for making loans. On February 9, the Government announced that it will infuse a total of ₹6,990 crore into nine public sector banks (PSBs), including State Bank of India, Bank of Baroda, Punjab National Bank, Canara Bank and Syndicate Bank.

In February 2014, in the Interim Budget for 2014-15, the then UPA Government said ₹11,200 crore would be provided for capital infusion in PSBs.

But to keep a lid on the fiscal deficit, the NDA Government has restricted it to ₹6,990 crore.

Based on the new criteria — above average return on assets (RoA) for the last three years and return on equity (RoE) for the last financial year — 13 other PSBs were denied capital.

When the capital infusion announcement was made, the Government said only banks which are more efficient will be rewarded with extra equity capital so that they can further strengthen their position.

Clearly, PSBs have their task cut out. To improve the RoA and RoE, they will need to increase income and reduce expenditure.

“Since capital charge for retail loans is lower, we will focus more on such loans. This will also help rebalance our loan portfolio,” said a top official of a public sector bank, which did not get capital infusion.

Pointing out that announcement of the new criteria had caught him by surprise, the official said the Government should have given PSBs a year’s time to improve their financial ratios.

“Most of the public sector banks are profit making and give dividend to shareholders. Being the majority shareholder, the Government is the biggest beneficiary of the dividends. “I wonder if the Government will be agreeable if the banks, which did not receive capital, do not declare dividend this year and plough back profits to strengthen their capital base,” said the CFO of a PSB.

In fiscal 2013-14, PSBs had collectively paid dividends of ₹6,758 crore to the Government.

The CFO pointed out that when the NDA Government is pushing the growth and development agenda, denying capital to PSBs, which usually shoulder the burden of financing infrastructure projects and also meet social objectives such as Pradhan Mantri Jan Dhan Yojana, is a big disappointment.