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Capital infusion won't solve banks' woes, say analysts

By Anup Roy and Sheetal Agarwal
July 20, 2016 09:01 IST
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A bankTiming good but money not enough for lenders to grow business, report Anup Roy and Sheetal Agarwal

The government’s decision to recapitalise public sector banks is on expected lines but not enough to prod banks to grow their book and cover the capital erosion caused by ballooning bad debts.

However, it does give a signal to the lenders that they can continue with their book-cleaning exercise, said analysts.

The government said it would infuse Rs 22,915 crore (Rs 229.15 billion) of capital in 13 banks, including Rs 7,575 crore (Rs 75.75 billion) in State Bank of India.

This was lower than the Rs 25,000 crore (Rs 250 billion) the government had originally planned.

But, the allocation also included Rs 3,100 crore to Indian Overseas Bank and Rs 1,000 crore (Rs 10 billion) to UCO Bank.

Both banks have gross bad debts ratio of more than 15 per cent and, therefore, are considered laggards in the system in terms of performance metrics.

Analysts did not see much of a material impact due to the infusion and said the money was not enough to fund growth.

“Overall, the capital infusion is insufficient for most PSU banks,” said Suresh Ganapathy, financial analyst at Macquarie Capital.

“On an average, PSU banks’ capital adequacy ratios (both tier-1 as well as CAR) will improve by 35-40 basis points after this capital infusion.

"For SBI, the uptick will be higher than 50 basis points, while for others it could be lower than 50 basis point.”

Analysts said the timing of the infusion was good.

“This shows that the government is taking cognisance that banks need capital to clean up their books.

"It will encourage banks to recognise NPA in their books throughout the year and continue with their clean-up measures,” said Rajiv Mehta, AVP Research at IIFL.

The capital infusion would help State Bank of India expand its books by Rs 50,000-60,000 crore, (Rs 500-600 billion), said Yogesh Mehta, VP of Motilal Oswal Securities Ltd.

“With this kind of loan book expansion and by maintaining margins at three per cent, we could see some good traction in SBI results in the coming quarters,” said Mehta.

However, the capital infusion to a large lender like Bank of India was inadequate, he said, adding that banks can grow at 11-12 per cent in the coming quarters with the capital received.

But India Ratings, the local arm of rating agency Fitch Ltd, was not impressed with the capital infusion.

Fitch’s director of financial institutions Abhishek Bhattacharya termed the infusion as a bailout, rather than something that would aid in growth.

Fitch Ratings had last week estimated that even with a capital infusion of Rs 25,000 crore (Rs 250 billion), the banks’ growth would fall to a two-year low of nine per cent over FY16-FY19.

The image is used for representational purpose only. Photograph: Reuters

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Anup Roy and Sheetal Agarwal in Mumbai
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