Mumbai: Shares of public sector banks (PSBs) surged on Thursday after the government announced fresh capital infusion of Rs. 48,239 crore in state-run banks to help them meet stricter regulatory requirements and boost credit growth.
Shares of Corporation Bank, UCO Bank, United Bank of India, Indian Overseas Bank, Central Bank of India, Allahabad Bank, Andhra Bank, Bank of Maharashtra, Syndicate Bank, Punjab National Bank, Union Bank of India, and Bank of India were up 2-19% on Thursday. Among all PSBs, only Indian Bank and Bank of Baroda closed lower.
The benchmark index Sensex gained 0.40% to close at 35,898.35 points, while Bankex gained 0.23% to close at 30,222.59 points.
Corporation Bank will receive the highest capital infusion at Rs. 9,086 crore, followed by Allahabad Bank’s Rs. 6,896 crore. Punjab National Bank will get Rs. 5,908 crore, Union Bank of India will get Rs. 4,112 crore, Andhra Bank will get Rs. 3,256 crore, and Syndicate Bank will get Rs. 1,603 crore.
This is part of the overall Rs. 1.06 trillion capitalisation plan for fiscal year 2019, which the government had announced earlier.
The huge capital infusion into Allahabad Bank and Corporation Bank will enable them to make aggressive provisions and write-offs, thus lowering their net non-performing loans to less than 6%, which is one of the key thresholds under the Prompt Corrective Action (PCA) framework, according to Motilal Oswal Securities Ltd. The capital infusion will help the better-performing banks to come out of the PCA framework, without the Reserve Bank of India (RBI) relaxing the norms, it said.
“Post this capital infusion, the government’s shareholding across PSU banks will increase in the range of 1-11%, with the maximum increase for Union Bank of India (11%) and the least for Bank of Maharashtra (1%). Further, the banks will see an improvement in their Common Equity Tier 1 (CET-1) ratios in the range of 28-789 basis points (bps), with the maximum increase for Corporation Bank and the least for Bank of Maharashtra. A large part of this capital would be consumed towards aggressive provisioning for NPAs," it said in a note on 20 February.
Meanwhile, economists at Bank of America Merrill Lynch (BofAML) said they are more confident of lending rates coming off, with the recapitalising of PSBs by an additional ₹48,239 crore. “We expect banks to cut lending rates by 50bps by March 2020 reversing the 30bps hike in 2018. ...The finance ministry and RBI’s measures are easing banking stress: Bank recapitalisation releasing 6-11 banks from PCA restrictions, pushing back stringent capital adequacy requirements and restructuring MSME stressed standard assets," BofAML said in a note on 21 February.
BofAML estimates that the central bank will have to inject $35 billion of durable liquidity in FY20 to fund 15-16% credit offtake. “Our stress tests show this will likely need RBI OMO of $20 billion, assuming $9 billion of RBI forex intervention. This, in turn, should clear the G-sec market, soften yields and create room for lending rate cuts," it said.