After remaining silent on recapitalization of public sector banks (PSBs) in February’s interim budget, the government has pledged to infuse ₹70,000 crore into these banks laden with bad loans, an amount that has crossed expectations. While some of the lenders will tap the funds to meet regulatory requirements, the rest will use it to cater to credit demand.
Finance minister Nirmala Sitharaman said on Friday that gains from the bank clean-up are now visible. Bad loans of commercial banks, she said, have fallen by over ₹1 trillion in the past year, and they have recovered over ₹4 trillion with the Insolvency and Bankruptcy Code (IBC) and other measures effected over the last four years.
Arijit Basu, managing director, State Bank of India (SBI) said ₹70,000 crore is definitely a significant amount, more than what was being expected. “It will be used by banks to improve their credit growth," he said.
Analysts had estimated a recapitalization of around ₹35,000-45,000 crore to support a credit growth of 12-13% in FY20.
Private sector lenders are better capitalized, have better asset quality and have also reported profits in the last fiscal year. In FY19, all but two private banks— IDBI Bank and Lakshmi Vilas Bank—reported profits, against a dozen of the 18 state-run banks that reported losses. While the average capital adequacy of private banks stood at 14.85% in FY19, that of PSBs was 12.41%.
In FY19, the government had infused over ₹1 trillion in PSBs with the last round of ₹48,239 crore in February, allowing six banks to exit the Reserve Bank of India’s (RBI) prompt corrective action (PCA) framework. Under the PCA, banks that have breached certain thresholds in bad loans and capital adequacy are subjected to restrictions in lending and opening new branches, among others.
In February, funds were infused into Corporation Bank ( ₹9,086 crore), Allahabad Bank ( ₹6,896 crore) and Bank of India ( ₹4,638 crore), among others. In FY18 and FY19 put together, the government has pumped in ₹1.96 trillion.
Data compiled by Icra showed that the core equity capital position of PSBs improved to 9.2% as on March 2019 from 8.4% as on March 2018.
“The higher-than-expected capital support to the PSBs in FY20 reiterates the government of India’s intent to bring them out of PCA and also provide with growth capital," said Karthik Srinivasan, senior vice president and group head, financial sector ratings at Icra.
The PCA framework was a bone of contention last year between the RBI, then led by governor Urjit Patel, and the Union government. The government argued that lending curbs were squeezing liquidity and impeding economic recovery. After Patel quit, in January 2019, the RBI relaxed norms by removing one threshold—return on assets—from the framework, saying it is already reflected in capital adequacy. Banks now under the PCA are United Bank of India, Indian Overseas Bank, Central Bank of India, IDBI Bank and UCO Bank.
Karnam Sekar, managing director and chief executive, Indian Overseas Bank, acknowledged that the government has helped banks through continued capital infusions and introducing IBC. “However, I think that if there are some growth incentives for the economy as a whole, banking will definitely pick up, as growth is the only issue now," said Sekar.
Banks have reported credit growth of 13.29% year-on-year in FY19, up from 10% the previous year. However, deposit growth was a mere 10% in FY19. Since most lenders rely on deposits to extend credit, they have started reducing excess statutory liquidity ratio (SLR) holdings to be able to give loans.
The RBI mandates banks to keep a minimum of 19.25% of their liabilities in risk-free government securities, but many banks have for long maintained SLR of as much as 30% amid weak credit growth.
While the government might want to wean PSBs away from public fund infusions, these banks would certainly find it difficult to tap capital markets. For instance, 12 of the 18 PSBs that reported losses in the March quarter of FY19 have significantly eroded their capital base.
Some analysts pin hopes on the government using the RBI’s excess capital reserves to replenish these banks. This exercise, however, will have to wait since the Bimal Jalan committee quantifying excess capital is still at work. Bank of America Merrill Lynch expects the government to recapitalize PSBs with excess RBI economic capital of ₹1-3 trillion ($14-42 billion), likely to be identified by the Jalan committee. “This should be liquidity-neutral and fiscal deficit-neutral. With the Modi government getting a renewed popular mandate, it should be easier for the Jalan committee to hand over the excess RBI capital in one shot to the finance ministry," it said in a note on 24 May.
The crisis in non-bank lending too has bared the interconnectedness of India’s financial system. There have been problems with regard to asset quality of banks which have exposure to troubled non-banking financial companies (NBFCs). However, there are some gains for the banking system as well, with stronger banks expected to stand out in the coming years. A 1 July Credit Suisse note said there is a clear shift in market share gains in favour of stronger banks having low-cost liabilities from weaker NBFCs.
Lenders are also waiting for large amounts to be recovered through the IBC. Many large cases are stuck in litigation. SBI chairman Rajnish Kumar said in March that around ₹16,000 crore of recoveries will come from three National Company Law Tribunal (NCLT) accounts—Essar Steel, Alok Industries and Bhushan Power and Steel, all at various stages of insolvency resolution.
However, experts agree that while the IBC’s implementation has not been as fast as it was expected to be, it is nonetheless better than previously available tools. In a 24 May report, Crisil said exactly three years since it was legislated, the IBC has made material progress in addressing the logjams it was supposed to—faster recovery of stressed assets and quicker resolution timelines.
Recovery through IBC was around ₹70,000 crore in FY19—or twice the ₹35,500 crore recovered through other mechanisms such as the DRT, Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, and Lok Adalat—in FY18, said Crisil.
As on 31 March 2019, there were 1,143 cases under the IBC of which resolution in 32% of the cases was pending for more than 270 days.
Nitesh Jain, director, Crisil Ratings said, “Going ahead, success will hinge on timely resolution of stressed assets and a conducive ecosystem."
Apart from fresh capital and impetus for recovery of large corporate loans, bankers also expected more sops for small businesses.
The budget proposed to allow an additional deduction of up to ₹1.5 lakh for interest paid on loans borrowed up to 31 March, 2020 for purchase of an affordable house valued up to ₹45 lakh. For micro, small and medium enterprises (MSMEs) the government said it will create a payment platform to enable filing of bills and receive payments in order to cut delays in payments to these small businesses.
