After private sector banks' capital raising exercise, the public sector banks (PSBs), which control over two-third of deposits and advances in banking, are also lining up to create capital buffers to absorb likely NPAs and capital erosion after the end of six-month loan moratorium.
Currently, the chances of PSBs getting timely and adequate capital from fiscally constrained government looks very bleak. The banking regulator, the Reserve Bank of India (RBI), has already asked commercial banks to create capital buffers in view of COVID-19 related stress.
The country's largest bank, the State Bank of India (SBI), which had earlier indicated that it had no immediate plan to raise capital, has now lined up a proposal to raise Rs 25,000 crore capital.
The IDBI Bank, where LIC is the new promoter, has plans to raise Rs 11,000 crore equity capital to improve its capital base. Bengaluru-headquartered Canara Bank and Central Bank of India have also firmed up plans to raise Rs 5,000 crore each through equity capital. The Punjab National Bank, which has sufficient capital with capital adequacy ratio at 14.14 per cent, is planning to raise capital towards the end of the year.
But, unlike private banks, PSBs will not be able to raise capital from the market at a good price (equity) and rate (debt capital). The valuations of PSBs are very low in the stock market. So, any large amount of capital means higher equity dilution. The price to book, which is an indicator of the banks' valuation shows a huge gap between PSBs and private banks. For instance, the PSBs' market price to book value is less than one times, whereas the private banks have price to book of 3-5 times. Kotak Mahindra Bank has one of the biggest price to book of over 5 times.
Most of the PSBs are largely dependent upon government for capital because of government ownership and low valuation in the market. In the recent past, the government has used the recapitalisation bond route to infuse capital.
Under recap bonds, the government issues bonds which are subscribed by the PSBs. The money which the government receives as subscription from banks is pumped back to them as government capital. The government's net outgo every year will be the interest on bonds whereas the bond sits in the banks' book as investment. However, the full liability would crystallise on the government once the bond reaches its maturity or redemption.
In the last 5 years, the government has infused Rs 3.08 lakh crore capital in the PSBs. The government had last used the recap bond route in 2017 to infuse Rs 2.11 lakh crore capital.
The RBI Governor Shaktikanta Das last week said that a recapitalisation plan for PSBs and private bank has become necessary because of likely higher NPAs and capital erosion of banks post COVID-19. "Building buffers and raising capital will be crucial not only to ensure credit flow but also to build resilience in the financial system," said Governor Das.
The current capital adequacy ratio of PSBs is at 13 per cent, though comfortable, but not sufficient if the NPAs spike post the lifting of six-month moratorium. In fact, banks are already sitting on high NPAs at 8.3 per cent.
Currently, the banks' 40 per cent of the term loan book is under six-month moratorium. There are fears that there will be a spike in NPAs once the moratorium ends in August next month. Given the falling GDP, which is likely to shrink in 2020-21, the stress in the corporate sector and the economy will only increase, and the burden of which will eventually fall on the shoulders of the banks.
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