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Why PSBs need another round of big capital infusion

The Union Budget 2017-18  has clearly left the public sector banks (PSBs) to fend for themselves by allocating a meagre Rs 10,000 crore for recapitalisation.  Under the 'Indradhanush' Plan  unveiled in August 2015, the BJP-led NDA government allocated Rs 70,000 crore capital over four years  till 2018-19.

twitter-logo Anand Adhikari        Last Updated: February 14, 2017  | 20:08 IST
Why PSBs need another round of big capital infusion

The Union Budget 2017-18  has clearly left the public sector banks (PSBs) to fend for themselves by allocating a meagre Rs 10,000 crore for recapitalisation.  Under the 'Indradhanush' Plan  unveiled in August 2015, the BJP-led NDA government allocated Rs 70,000 crore capital over four years  till 2018-19.  Out of this,  the government pumped in Rs 50,000 crore in  2015-16  and 2016-17.  The allocation for last two years was Rs 10,000 crore each.  So as per plan , the allocation for 2017-18 was Rs 10,000 crore.  The Government is now mulling launching 'Indradhanush-II'  for further capital infusion in PSBs. Why do PSBs need another round of big capital doses ?

1) Deteriorating Financial Position --  The financial position of PSBs have deteriorated in the last two years because of higher NPAs and  consequent provisioning. The credit growth has fallen big time and banks are not making enough money to cover the escalating provisioning for NPAs. This has impacted the profitability of PSBs.  The Return on Assets (ROA) of SBI, for example, has gone down from 0.75 per cent  in September 2015 to 0.44 per cent in December 2016.  In the case of  Central Bank of India, ROA has fallen from 0.15 per cent to negative (-0.79 per cent). The story is the same for other PSBs.

2) Falling Valuations - One of the assumptions made under  Indradhanush was higher valuation of PSBs post the governance reforms initiated in  the banks. The big reforms included inducting professional CEOs.  While the new CEOs have been doing their job, it would take years for the changes to percolate down. The stock market is also not very supportive as the last two years have seen stagnant index returns.

3) Delay in unlocking of non -core assets -  The banks were also slow in selling non- core assets as valuations were low in the market. The sale of non-core assets was supposed to generate internal capital for banking business. Some banks managed to sell few assets, but a majority of them are still evaluating non-core assets sale.

4) Not much success in recovery --  The banks NPAs have been piling up in the last two-three years , but there is no matching recovery.  The asset reconstruction companies (ARCs) have bought assets aggressively from banks by paying 5 per cent of the total value.  These ARCs are not able to  recover money to pay banks on their investments. The Strategic Debt Restructuring ( SDR ) has also failed in selling stake to new buyers.

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