“We expect the bulk of the stress to come through in FY22 due to the 180-day regulatory moratorium on the recognition of impaired loans, which will delay the full recognition of stress in the current financial year. State banks are likely to account for the bulk of the capital shortfall, as large private banks should stay above the minimum requirements, despite some capital erosion in a high-stress scenario,” said Fitch Ratings.
But does the government have enough reserves to sail the PSBs across the pandemic-sea successfully?
NDA’s bank recapitalisation
A recapitalisation plan worth Rs 2.11 lakh crore was announced in October 2017. Of the total sum, Rs 1.35 lakh crore was to be infused by the government through sale of bonds, while the rest would come from budgetary support and fund raising by the public sector banks (PSBs). Around Rs 58,000 crore were to be raised by the PSBs, they couldn’t raise money. Hence, the government, along with injecting Rs 88,000 crore in banks in FY18 and the remaining Rs 65,000 crore in FY19, had to provide with an additional support worth Rs 41,000 crore with an aim to help the weaker ones that were under the RBI’s PCA framework.
Link: PSBs will have to wait longer to exit PCA framework
However, the multiple recapitalisation injections failed to meaningfully improve PSBs or state banks’ core capital.
“The government so far has injected around $43 billion in fresh capital into PSBs over the past five years (FY15-20). However, the injections failed to meaningfully improve state banks’ core capital, as they were piecemeal and preceded large losses, which were often 2x-3x higher than the capital infused. In real terms, around 60% of the above injected capital came in the past two years — most of which went towards bridging capital shortfalls,” noted Fitch.
What started with high impaired loans and depleted loss-absorption capacity, has slowly become a problem of capital erosion. And things may get worse despite the regulatory measures announced by the Reserve Bank of India, including a 180-day moratorium, to tide over COVID-19 induced disruptions.
Capital war chest
To strengthen their balance sheet and capital positions, many Indian banks have announced capital raising over the last few weeks.
| Bank | Amount |
| State Bank of India | Rs 11100 crore |
| HDFC Bank | Rs 50000 crore |
| Axis Bank | Rs 15000 crore |
| Kotak Mahindra Bank | Rs 7442 crore |
| DCB Bank | Rs 1000 crore |
| Bank of Baroda | Rs 13500 crore |
| ICICI Bank | Rs 15000 crore |
| IDFC First Bank | Rs 2000 crore |
| RBL Bank | Rs 3000 crore |
| IDBI Bank | Rs 595 crore |
(Source: Exchange filings)
Except for SBI and BoB, all the eight lenders are private sector banks (PvSBs). Most of the private banks are well capitalised and should be able to absorb the increase in provisioning. Moreover, these banks have more capacity to raise external capital than PSBs.
What about the weaker banks?
On February 20, 2019, the MoF had infused Rs 48,239 crore in 12 PSBs to ensure that the lenders are able to maintain regulatory capital requirements and boost overall growth.
Later in August 2019 (FY20), the government had announced the upfront capital infusions of Rs 55,250 crore into 10 PSBs, listed below.
| Bank | Amount (FY20) |
| Punjab National Bank | Rs 16000 crore |
| Union Bank | Rs 11700 crore |
| Bank of Baroda | Rs 7000 crore |
| Canara Bank | Rs 6500 crore |
| Indian Bank | Rs 2500 crore |
| Indian Overseas Bank | Rs 3800 crore |
| Central Bank of India | Rs 3300 crore |
| UCO Bank | Rs 2100 crore |
| United Bank of India | Rs 1600 crore |
| Punjab and Sind Bank | Rs 750 crore |
(Source: Ministry of Finance)
Given the ongoing economic turbulence there seems to be a vital need for timely and adequate capital injections in light of the disproportionate burden placed on banks to support distressed sectors through increased credit.
Many ratings agencies and other international institutions expect India’s economic activity to contract by 5% in FY21, with considerable downside risk. State-owned banks are under tremendous pressure to support distressed sectors, both within and outside the government’s announced stimulus measures and this may eventually put the burden on the government to take care of any capital shortage. And in the absence of adequate recap, certain banks can display high risk aversion. Private lenders, though under less pressure due to their better capitalisation, are also at risk of capital erosion. However, analysts believe that private banks have been more pro-active issuers of equity and are less likely to breach minimum regulatory capital ratios under high-stress scenario.
In a media interaction during Q4FY20 results in June, SBI CMD Rajnish Kumar had said, “Many of the banks, depending upon their own situation, may have to raise capital. PSBs may have a situation where the govt may have to provide some capital to some of the banks.”
Conclusion
After the mega merger, most PSBs improved their capitalisation last year, but experts believe that this might provide some support in the near-term. However, the requirement may vary from bank to bank, depending on the growth and level of provisioning.
Another global rating agency estimates a recapitalisation need of Rs 35,000-40,000 crore in the ongoing financial year, noting that the government may write another cheque for Indian banks. S&P Global ratings said, “Government-owned banks as a whole should be able to absorb the estimated credit losses without breaching the regulatory minimum, but these banks need capital to grow. In our base case, where we have factored in 4-5% credit growth for government-owned banks in the current fiscal year, and we estimate that the government-owned banks need about Rs 35,000-40,000 crore of capital this year.”
Though FM Nirmala Sitharaman has not provided for any capital infusion in the current year’s budget, the government can infuse capital into the PSBs should the need so arise to support the Indian Banking Sector at large.
