Mumbai: In its annual report released this week, the Reserve Bank of India (RBI) stressed the criticality of recapitalisation of banks amid the pandemic and economic downturn. But in the last few months, public sector banks (PSBs) haven’t been able to raise funds even as leading private sector banks have done so in anticipation of higher provision needs.
Analysts estimate that PSBs require around Rs 60,000 crore in the current financial year, but these banks are currently struggling to raise capital despite facing asset quality challenges amid the Covid-19 pandemic.
To make matters worse, the government hasn’t allocated any capital for PSBs in this year’s Union Budget, after infusing Rs 2.65 lakh crore in the previous three fiscals.
On their part, the private banks have done better. Earlier this month, ICICI Bank raised Rs 15,000 crore while Axis Bank picked up Rs 10,000 crore from the markets to strengthen their capital ratios. Even the struggling lender Yes Bank raised Rs 15,000 crore last month.
According to RBI estimates, the banking system-level capital adequacy ratio can drop to 13.3 per cent by March 2021 from its year-ago level under baseline scenario, and to 11.8 per cent under the very severe stress scenario.
The gross non-performing assets (NPAs) of banks may also surge 1.5 times above their March 2020 levels under the baseline scenario and by 1.7 times in the very-severe stress scenario.
In its report, the RBI noted, “The minimum capital requirements, which are calibrated on the basis of historical loss events, may no longer suffice to absorb post-pandemic losses.”
So why are PSBs unable to raise funds?
According to analysts, PSBs are struggling due to a stock price correction and the government shareholding.
Ajay Saraf, executive director & head of investment banking, ICICI Securities, said a lot of PSBs are expressing their intention to raise capital, “but their stock prices have corrected quite a bit”.
“For raising capital now, some of these banks will have to face the issue of government holding coming down below 51 per cent, and they seem to be mindful of that. In other words, the public sector banks will have a constraint on the amount of capital they can raise if the government holding is to remain at minimum 51%,” said Saraf.
He added that the fundraising exercise was also delayed because of recent mergers among PSBs with a lot of management bandwidth being spent on integration efforts.
There is also a more fundamental factor, pertaining to governance standards, note experts. They say the investors are more comfortable with private sector lenders due to their governance structure and the ability to deploy capital efficiently.
“It has been the case for the last three years that we have seen PSU banks struggling to raise capital which is why the government is constantly funding them. But private banks are able to raise capital amid any situation,” said Rajiv Mehta, executive vice president, Yes Securities.
“Clearly, the receptivity and the interest of investors towards the private banks are significantly higher than the public sector banks,” said Mehta.
He said there is an issue over the continuity of managing directors and chief executive officers.
“The way they control the operation, one is not sure of what kind of balancesheet risk will come to the fore over time. The control over the operations are loose, there is a culture issue, efficiency issue,” said Mehta.
“There are three issues that emerge — one is governance, one is efficient allocation of capital and the third is return on capital. In these three metrics, they are far behind from the private banks,” Mehta added.
India’s largest lender, State Bank of India, is seen as an outlier in the PSB space as far as investors’ interest is concerned.
SBI is better managed and has a strong balancesheet. It also has capital buffers, in the form of insurance and mutual fund subsidiaries, which are top performers in their respective businesses. This allows the lender to raise capital by selling stake in these subsidiaries.
The PSB requirements
Earlier this month, the RBI allowed banks to go for a one-time loan restructuring as it sought to give banks more space. This will ease some asset quality pressure in the current fiscal and the extent of capital that was otherwise required.
However, rating agency ICRA estimates that PSBs will still need Rs 50,000 crore to Rs 60,000 crore in the current financial year, even assuming marginal growth in assets.
“With the restructuring guidelines, the rise in NPA could be limited, so our estimate is they will need around Rs 50,000 crore to Rs 60,000 crore capital in the current financial year, assuming marginal growth of 4-5% in risk weighted assets,” said Karthik Srinivasan, group head, financial sector ratings, ICRA.
“This estimate also assumes banks maintaining some cushion of 50-100 bps over the regulatory requirements,” said Srinivasan.
He noted that the share prices of PSBs trading below the book value makes it more challenging for them to raise equity capital.
Srinivasan also said while the government has not announced any capital infusion for PSBs so far, nothing stops them from announcing such a step in due course.
The other option for the PSBs is to monetise the non-core assets, say analysts. These banks have stakes in insurance companies, mutual fund houses, among others. However, even as some PSBs look to sell stakes in these companies, it has come without much success.