Public sector banks or PSBs have been facing somewhat choppy waters in recent years due to a mix of several reasons right from long-standing NPAs and over-exposure to stressed assets to non-performance. The Indian Government has been attempting to salvage the situation in collaboration with the Reserve Bank of India (RBI) which is the apex bank. Yet, much more needs to be done.
In recent reports, it has emerged that the Union Finance Ministry is closely considering the requirements of public sector banks in the country. Studies also state that the Government may look at infusing somewhere around Rs. 30,000 crore via the new Union Budget to help banks adhere to the minimum capital needs as per regulatory directives in the present financial year.
Key things to know about the Government’s banking measures
- The first Union Budget of the newly elected Government will be presented on the 5th of July, 2019, by the new Union Finance Minister, Nirmala Sitharaman.
- The timing of the budget is crucial since it comes after the Indian economy touched a new 5-year low of 6.8% of growth for FY2018-19.
- PSBs will need sizable capital in order to ensure ample credit growth which has only started improving recently.
- 5 weak banks which are placed under the PCA (Prompt Corrective Action) mechanism of the apex bank (RBI) will also require sufficient capital for maintaining the minimum regulatory capital ratio based on the Basel III guidelines.
- Additionally, in case the Central Government chooses another round of consolidation like it did in case of Bank of Baroda, these mergers will also need fresh capital infusions as per reports.
- The Government put in Rs. 5,042 crore for boosting the capital base of Bank of Baroda for covering additional expenditure on account of its merger with Vijaya Bank and Dena Bank.
- The Central Government infused a record Rs. 1,06,000 crore in PSBs in the previous financial year. This was increased from the previous provision of Rs. 65,000 crore in December last year.
- Due to this capital infusion, 5 Indian public sector banks, namely Oriental Bank of Commerce (OBC), Allahabad Bank, Corporation Bank, Bank of India (BOI) and Bank of Maharashtra were able to come out of the PCA framework.
- The merger with Bank of Baroda helped Dena Bank shed its weak bank
- Only 5 banks out of 11 are now under this category of the apex bank.
- With regard to mobilizing of necessary resources, reports have stated that these banks are not successful in tapping capital markets on account of lower share prices.
- The sale of non-core assets is not sufficient to meet requirements and capital infusion will be needed from the Central Government in the current financial year.
- The amount that will ultimately be infused will naturally depend on the figures for the current financial year and the final decision will come from the Union Finance Ministry.
- The requirement as of now does stand at anywhere between Rs. 20-30,000 crore as per reports.
- However, this is on the assumption that banks will be able to raise funding by themselves from the mainstream market via share and asset sales.
- Several banks like Bank of Baroda (BoB) and State Bank of India (SBI) have already obtained approval from the board for raising capital whenever it is needed.
- Bank of Baroda (BoB) is reportedly planning to raise a sum of approximately Rs. 11,900 crore in the present financial year via sale of shares which also includes the Employee Share Purchase Scheme for enhancing capital and meeting needs for business expansion.
- The bank is expecting to mop up Rs. 1,500 crore from the BoB-ESPS or the Bank of Baroda Employee Share Purchase Scheme. This will be limited to the overall threshold of the capital plan of Rs. 11,900 crore for FY2019-20.
The Government will also look at taking several far-reaching measures in order to boost the health of the Indian banking sector. The growing number of NPAs posed a major threat to several banks although quite a bit has already been addressed/resolved. Going forward, large defaulters will have to be brought to book and the Jet Airways crisis has to be handled deftly.
The Government should also look at more mergers and consolidations as per several experts in order to reduce the number of public sector entities and create bigger banks that will have a wider reach, more capital and overall market presence. This may be a shot in the arm for the sector in terms of helping it achieve future growth targets. Indian banking is still to come out of the woods but the Central Government is en route towards giving it another major financial push that is the need of the hour. All eyes are now on the Union Budget which is the first for the newly elected Government.