Till November 2018, government has infused close to Rs 22,900 crore in seven PSBs.
Centre may not increase its bank recapitalisation target for 2018-19 after RBI relaxed the capital conservation buffer (CCB) framework, rating agency ICRA said on December 12.
"ICRA expects the government to keep the bank recapitalisation plan for FY19 unchanged at Rs 65,000 crore as the capital support during the current year has been restricted to only those public sector banks (PSBs) that were breaching or likely to breach the regulatory capital ratio (of 9 percent)," it said in a report.
ICRA reasoned that the relaxation of CCB framework and the Life Insurance Corporation's (LIC) takeover of the IDBI bank would provide cushion to the Centre.
"We expect these recent events can potentially reduce the government's capital support to PSBs by up to Rs 45,000 crore. Accordingly, as against our earlier expectations of Rs 1.2 trillion of capital requirements for PSBs during FY19, we expect Centre’s capital support for PSBs to remain unchanged at the budgeted capital of Rs 65,000 crore," said Karthik Srinivasan, group head, Financial Sector Ratings, ICRA Ltd.
The government had announced a massive bank recapitalisation programme last year to help their ailing financial health. It had pronounced to infuse Rs 2.11 trillion in the banking sector via recapitalisation bonds (Rs 1.35 trillion), budgetary support and raising funds from market (together Rs 76,000 crore).
The report also said that "softening in bond yields and consequent reversal of mark-to-market (MTM) losses on bond portfolios, coupled with significant reduction in risk weighted assets by PSBs is also expected to lower the capital requirements of PSBs despite sizeable losses estimated for FY19”.
Till November 2018, government has infused close to Rs 22,900 crore in seven PSBs, while LIC has injected about Rs 21 billion in IDBI as per its takeover measure. The agency expects the government to divide rest of the amount equally between PCA and non-PCA banks.
Banks under PCA are the public banks that are facing lending restrictions by the RBI under its Prompt Corrective Action framework. The PCA framework kicks in when banks breach any of the three key regulatory trigger points -- namely capital to risk weighted assets ratio, net non-performing assets (NPA) and return on assets (RoA).
"Even in a scenario, whereby if a PCA bank is able to raise sufficient capital and makes sufficient provisions against its NPAs, reduces NNPAs below PCA threshold of 6 percent and improves its capital ratios above regulatory level; it will have two consecutive years of losses, i.e. FY18 and FY19. Hence, based on existing PCA regulations, these banks can exit PCA only on their 2019-20 performance, i.e. during FY21," Srinivasan added.
As of September 2018, PSBs reported a loss (before tax) of over Rs 45,000 as compared to a loss of about Rs 31,800 crore during the same period last year. Private Banks too reported losses because of lower gains on their treasury portfolios, thereby reporting a 10 percent decline in their net profits to Rs 20,600 crore during April-Sept in 2018 from Rs 22,900 crore during the same period last year.
The report said that public sector banks would see reduced losses in the second half of FY19 due to "reversal of MTM losses on their bond portfolios" even as total sectoral losses will remain between Rs 67,600 crore and Rs 85,200 crore.
The report also said that gross NPA will continue to decline in the coming months. As of September 2018, the sector had GNPA at Rs 10 lakh crore (11 percent) as against Rs 10.23 trillion (11.68 percent) at the start of this fiscal.
"With ongoing resolution of stressed assets, we expect GNPAs and NNPAs for banking sector are likely to reduce to ~10.2 percent and 4.3 percent respectively by March 2019, which in absence of resolution could have been higher at 12.2 percent and 4.9 percent respectively," Srinivasan said.
