In a message to public sector banks (PSBs) that only performers will survive, the government, in an unprecedented move, has decided to allocate capital to only nine PSBs, which have shown efficiency in recent years.
As a result, some lenders reeling under pressure due to mounting bad loans and depleted capital reserves have been left out.
The government has allocated Rs 6,990 crore (Rs 69.90 billion) towards capital infusion in nine PSBs this financial year, compared with Rs 11,200 crore (Rs 112 billion) allocated in the interim Budget for FY15 announced by the United Progressive Alliance government.
“Those who have performed better than average have been rewarded,” the finance ministry said in a statement.
For the allocation of capital, two parameters were considered — the weighted average return on assets (RoA) for all PSBs for the past three years (those scoring above average were considered) and return on equity (RoE) in the last financial year.
“The government of India has adopted these new criteria through which only banks that are more efficient only be rewarded with extra capital for their equity so that they can further strengthen their position,” the statement added.
Lenders that have received the highest share of capital were State Bank of India (Rs 2,970 crore), Bank of Baroda (Rs 1,260 crore) and Punjab National Bank (Rs 870 crore).
Some banks that haven’t received capital from the government will face challenges in raising funds, owing to pressure on asset quality.
Indian Overseas Bank, for example, which reported net losses for two successive quarters (those ended September and December 2014), saw its capital adequacy ratio drop to 10.15 per cent as of December-end from 10.99 per cent a year earlier.
The average net loss for the two quarters stood at Rs 750 crore (Rs 7.50 billion).
The bank’s gross non-performing asset (NPA) ratio deteriorated by 77 basis points sequentially to 8.12 per cent, while the net NPA ratio stood at 5.52 per cent at the end of the December quarter compared to 5.17 per cent at the end of the September quarter.
Terming the government’s decision as a major shift in its approach to allocating capital, T M Bhasin, chairman and managing director of Indian Bank and chairman of the Indian Banks’ Association, said it would encourage good performance. Indian Bank didn’t seek capital in the past five years. For the past three years, it generated retained earnings of about Rs 1,000 crore.
“For the first nine months of this year, profits have been in the region of Rs 800 crore.
The government infusion of Rs 280 crore will help us manage asset growth comfortably in 2015-16,” he said.
Research by Business Standard showed Bank of Baroda’s RoE for the past three financial years was as 13-21 per cent, while that State Bank of India, it was 10-16 per cent.
Allahabad Bank, which has secured a grant of Rs 320 crore, has one of the RoEs and RoAs, at 11-22 per cent and 0.57-1.02 per cent, respectively.
In the past 15 months, most PSBs couldn't tap the equity markets to raise capital, despite favourable conditions such as abundant liquidity and a buoyant stock market.
This was because of subdued valuations and a sharp rise in NPAs and restructured assets. On the other hand, some private banks, which have seen valuations double, were quick to tap the stock market for raising capital.
According to Reserve Bank of India (RBI) data, the banking system's stressed advances increased to 10.7 per cent of its total advances from 10 per cent between March and September 2014.
"PSBs continued to record the highest level of stressed advances at 12.9 per cent of their total advances in September, while that for private banks stood at 4.4 per cent," RBI said in its latest Financial Stability Report.
