Front loading capital infusion is a key positive

Mounting bad loans and sharp slippages from restructured accounts have eroded earnings of many public sector banks over the last one to two years.

Banking stocks, therefore, cheered the Centre’s infusion of close to ₹23,000 crore into 13 PSBs on Tuesday. But what is particularly encouraging is the Centre’s decision to infuse capital in the beginning of the financial year rather than towards the end of the year. This will help banks plan their lending and other capital-raising activities for the year.

The Centre has been meeting the capital needs of State-owned banks in the past. After infusing ₹14,000 crore in 2013-14, the government became tight-fisted in 2014-15 infusing just ₹6,990 crore into these banks based on performance.

But given the sharp increase in bad loans and weak capital position of PSBs, the Centre decided to substantially increase its capital infusion in 2015-16. After earmarking a meagre ₹7,000 crore for capitalisation, the Centre ended up infusing about ₹20,000 crore into PSBs in 2015-16.

In the 2016-17 Budget, the Centre committed ₹25,000 crore into PSBs under its Indradhanush plan. On Tuesday, the Centre infused 92 per cent of this amount, and may inject more funds depending on the performance of banks. Market players, however, believe that much of the capital infusion for the year is done with.

While the amount earmarked by the Centre for capital infusion over the next couple of years clearly falls short of the actual requirement, frontloading it in the current fiscal is a key positive. Up until now, the Centre’s capital infusion exercise has been sort of a stop-gap arrangement, helping banks to meet their capital requirements at the end of the financial year.

This time around, the capital has flowed in at the beginning of the financial year — the first quarter itself. This has not happened in the last couple of years.

The benefit of frontloading is two-fold. One, depending on the level of stress and capital position, each bank can decide on the amount they want to lend for the year.

And, two, given that the Centre is the major shareholder in PSBs and has brought in capital, the banks can now plan other fund-raising activities such as qualified institutional placements (QIPs) going ahead.

Interestingly, SBI, which has one of the highest capital ratios, has received the most capital from the government. Of the ₹23,000 crore, SBI has received ₹7,575 crore, about a third of the total capital infused.

In the past too, SBI has been receiving a substantial share of the Centre’s allocation, ranging between 24 and 65 per cent since 2011-12 (in 2013-14 alone its share was a low 13 per cent).

SBI has one of the strongest capital ratios, with Tier-I capital at 9.92 per cent as of March 2016. Under Basel III regulations, the requirement of Tier-I capital, including the capital conservation buffer, has risen to 7.625 per cent for March 2016. Since SBI has about a fifth of the total advances in the system, the Centre could be paying more attention to it.

Indian Overseas Bank, PNB, Bank of India and Central Bank of India are someother banks that are on top of the capital infusion list this fiscal.

IDBI Bank, Andhra Bank, Bank of Maharashtra and Oriental Bank of Commerce are some banks that did not make the cut this time around and have not received any capital infusion.

While these banks have Tier-I capital at comfortable levels, bad loans and weak return ratios are causes for concern.

For instance, IDBI Bank has gross non-performing assets (GNPA) of 10.9 per cent of loans and negative return on assets (ROA) as of March 2016. Andhra Bank, Oriental Bank of Commerce and Bank of Maharashtra have GNPAs of 8-9 per cent with very low ROA of 0.1-0.2 per cent.