India@69-Bank Recap-Cleverly Wrapped Nothing

Public Sector Banks – Some reprieve by Government

Government has announced infusion of Rs. 70,000 crore in public sector banks (PSBs) over 4 years. The capital infusion is more indicative of government’s intent as the amount by itself is not enough as these banks have accumulated a pile of troubled assets and even more restructured loans are expected to turn bad. All the PSBs put together require Rs 1.8 trillion over the next four years to meet their capital requirements.

The average tier 1 capital adequacy ratio across smaller PSBs is 8% is much lower than given the quantum of stressed assets. For Indian Overseas Bank, Andhra Bank, Punjab National Bank (PNB) and Oriental Bank of Commerce stressed assets are in excess of 17% of their loan books. For Bank of India and Indian Bank it is around 14%. After adjusting for under provisioning and accounting for potentially bad assets hidden by restructuring the capital adequacy ratio falls to dangerously low levels.

Shares of most of the mid-size state banks are trading below their book values and this is limiting their ability to attract capital from the market. With this capital base it will be difficult for these banks to meet the demand for credit and adhere to new international standards which will come into effect by end of 2017. Government’s plan is that capital infusion of 70k crores would help improve the valuations of these banks and they will be able to raise remaining 110k crores from the market.

However given the track record of public sector banks this capital infusion might not be enough. A brief look at the last quarter results shows that the rot runs too deep. PNB announced 48% drop in net profit, Bank of India 84% drop and Union Bank of India 22% drop. The main culprit behind this drop was the substantial rise in their bad assets which are expected to rise further in coming quarters.

Along with the capital infusion these banks need economy to turn around so that credit growth can pick up and their interest income can rise. Government also needs to follow up on its promises to set up autonomous bank board bureau to recommend top appointments at these banks guide them on their strategies