New Delhi: The government will infuse more than ₹ 11,300 crore into five state-run banks in the next few days as it looks to provide capital support to ailing banks, a person familiar with the development said.
Of these five, Allahabad Bank, Corporation Bank and Indian Overseas Bank have been placed under Reserve Bank of India’s (RBI’s) prompt corrective action (PCA) framework. The other two banks—Punjab National Bank (PNB) and Andhra Bank—also have the PCA threat looming over them due to weak capital adequacy ratios and high levels of bad debt.
In the case of PNB, the capital infusion is necessary to help it avoid defaulting on the interest payments due on its additional tier-1 bonds. PNB has received conditional approval from RBI to pay its interest dues on AT-1 bonds, subject to a capital infusion from the government, said a second person familiar with the development. The interest payout on its ₹ 1,500 crore worth of bonds (8.98% annual) is due on 25 July and the lender has to receive the capital infusion before that, this person added.
Fraud-hit PNB had reported a record loss of more than ₹ 12,200 crore in 2017-18, adversely impacting its capital adequacy ratio.
Capital infusion into these banks comes at a time when the mega ₹ 2.1 trillion capitalization plan of the government announced last year has turned out to be inadequate in the face of the massive losses incurred by state-run banks as of March.
Nineteen of the 21 state-run banks reported losses amounting to ₹ 63,000 crore in the quarter ended 31 March due to rising non-performing loans. In the full year, the losses of these 19 banks was more than ₹ 87,000 crore, nearly wiping out the entire ₹ 90,000 crore capital infusion by the government in 2017-18.
Banks’ balance sheets are unlikely to improve this fiscal either. RBI, in its financial stability report released last month, had flagged that the gross non-performing asset (NPA) ratio of banks is likely to rise to 12.2% by March 2019 from 11.6% as of March 2018. Further, RBI said banks under the PCA framework may see their gross NPA ratio worsening to 22.3% by March 2019 from 21% in the year earlier and at least six of these 11 banks would see their capital adequacy drop below the regulatory requirements.
The government had not budgeted for any direct capital infusion in the current fiscal. Instead, it had only budgeted capitalizing state-run banks through recapitalization bonds amounting to ₹ 65,000 crore in 2018-19.
Therefore, it is likely to seek Parliament’s nod for additional funds to capitalize banks through the supplementary demand for grants that may be tabled in the upcoming monsoon session of Parliament.
In 2017-18, the government infused ₹ 10,000 crore through direct capital infusion and ₹ 80,000 crore through recapitalization bonds.
In an interview earlier this month, chief economic adviser to the finance ministry, Arvind Subramanian, said the government will need to infuse more capital in state-run banks.