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In this article,
we would discuss about capital to be infused in public sector banks over the next four years. Further, we will also look at the break-up of funds that will be released.
With non-performing assets (NPAs) of public sector banks (PSBs) soaring of late (as of the January-March quarter, gross NPAs stood at 5.20 per cent compared with 5.63 per cent in December), the Finance Ministry has announced that it will infuse Rs.70,000 crore over the next four years. in three tranches – Rs 25,000 crore in this fiscal and the next followed by Rs 10,000 crore each in 2017-18 and 2018-19.
Funds will be released in three parts
*As per the statement, Rs.25,000 crore for this fiscal will be allocated in three tranches.
*40 per cent will be for banks that require capital support. However, the government will ascertain that every bank maintains a capital adequacy of 7.5 per cent by 2015-16.
*Another 40 percent will be allocated to the top 6 PSBs: State Bank of India, Bank of Baroda, Bank of India, Punjab National Bank, Canara Bank and IDBI Bank Ltd.
*The third tranche of 20 per cent will be released in the last quarter of 2015-16 to banks that improve their performance in the preceding nine months.
Rs 25K cr decoded
It is interesting to note that the sum of Rs 25,000 crore promised for 2015-16 is way above the actual budgeted allocation of Rs 7940 crore. The finance minister recently got the Parliament’s approval to infuse an additional Rs.12,010 crore, thus taking the total planned infusion to around Rs.20,000 crore. Financial services secretary Hasmukh Adhia recently stated that this amount may be infused by September 2015. The remaining Rs.5,000 crore would be provided in subsequent supplementary demand later this year.
Banks still need Rs 1.1 lakh cr more
Yet, Rs 70,000 crore only amounts to less than half of banks’ capital needs. Finance minister Arun Jaitley stated that though PSBs are “adequately capitalised and meet the Basel III and RBI norms”, they would need Rs 1.8 lakh crore extra up to 2018-19 so as to comfortably comply with Basel III. This estimate has been arrived at based on “a credit growth rate of 12 per cent for 2015-16 and 12-15 per cent for the subsequent three fiscals, depending on the size of the bank and their growth ability,” as per a finance ministry statement.
Banks will need to raise the balance Rs.1.10 lakh crore from the markets. How can this be accomplished? As per ministry inputs, improved valuations combined with value unlocked from non-core assets and improvements in capital productivity will enable PSBs to raise the remainder.