Funding will fuel PSU banks, but not fix ’em

NEW DELHI: The more-than-expected capital provision of Rs 70,000 crore is expected to provide growth capital to public sector banks (PSBs) and facilitate stronger banks to acquire weaker ones. Capital was seen as necessary for some banks, given that recoveries from some large accounts under the insolvency process were taking longer than expected. However, most analysts had expected capital infusion of Rs 40,000-50,000 crore during the current fiscal.

The finance minister has said that new measures will be introduced to improve governance at PSU banks and also said highlighted that the government is pursuing the path of consolidation. According to SBI chairman Rajnish Kumar, the country’s largest bank neither requires nor expects additional capital from the government. He expects that with the capital infusion, the banking sector will be able to deliver credit growth of 13%. The government has already infused Rs 1.06 lakh crore in FY19 and Rs 90,000 crore in PSU banks in FY18.



“The bank recapitalisation of Rs 70,000 crore appears to be positive as it will not only address regulatory capital requirements but also the growth capital. In our view, with this capital infusion, all the PSBs should be able to exit the prompt corrective action (PCA) framework (which restricts lending for weak banks) and also facilitate the merger among PSBs,” said ICRA VP and head (financial sector ratings) Anil Gupta.

Gupta added that the dependence on banks for raising capital from market sources also stands substantially reduced and the credit growth of 12-13% is assured, even if PSBs are unable to raise capital from markets.

“The core problem remains unaddressed, which is of governance and ensuring indiscriminate lending does not lead to a whole new set of NPAs a few years hence. One can argue that some of the change in habits has been addressed via the IBC route. Yet again, markets were expecting announcements of strategic divestment or privatisation sales, which would allow new management to come forward to handle the entity,” said Sanctum Wealth Management chief investment officer Sunil Sharma.