Enhanced Recapitalisation For PSBS: Should The Street Cheer?

The Government’s Capital Infusion Plan Clearly Intends To Shrink The PCA List

Enhanced Recapitalisation For PSBS: Should The Street Cheer?
The Government’s Capital Infusion Plan Clearly Intends To Shrink The PCA List

It is worth noting the infusion will be on the lines of the Rs. 2.11 lakh crore recapitalisation plan announced last year which means capital will be infused through recapitalisation bonds. Hence, this will not entail actual cash outflow and any major adverse impact on the government’s fiscal position.

So which PSBs will benefit?

The government’s announcement is a big step towards revitalising banks saddled with non-performing assets (NPAs) and starved of capital, especially the ones placed under the prompt corrective action (PCA) framework.

The government’s first priority is to ensure that all PSBs meet the regulatory capital requirement i.e. a Capital to Risk-weighted Assets Ratio (CRAR) of 9 percent. Five out of the 21 PSBs reported Tier 1 capital of less than 7 percent (and CRAR of less than 9 percent) as on September end. These five banks (IDBI, Allahabad, UCO, United and CBI) will be the obvious beneficiaries of the infusion.

Secondly, capital will be infused into PCA banks that are performing better. This can result in a more rapid exit from PCA, as it can reduce net NPAs, improve capital ratios and improve profits in subsequent years. Currently, there are 11 banks placed in PCA. These banks are bleeding (FY18 loss – Rs 49,246 crore) and are likely to report losses of Rs 49,000 crore in FY19 as well, according to rating agency ICRA. Since these banks cannot issue Tier 1 bonds, there is no option but to provide capital to help them come out of the list. We can expect at least a couple of them  to exit the PCA list after the government’s planned infusion.

Thirdly, capital will be provided to non-PCA banks. Another half a dozen banks (PNB, Andhra, Canara, Union, P&SB and Syndicate) are in a queue to enter the PCA club. These banks haven’t been placed in PCA but meet all the criteria of a PCA bank. Capital support would mean they don’t fall into the PCA list.

Lastly, PSBs undergoing mergers may get capital support.

The government’s capital infusion plan will result in shrinking of the PCA list. It wants to clean up banks' balance sheets and in turn, wants PSBs to participate in stimulating credit growth. Clearly, the government is aiming for a revival of the investment cycle. However, as alluded  by Arvind Subramanian, former chief economic advisor, the challenges of stressed assets and weak balance sheet of PSBs would require the four 4 Rs: Recognition, Recapitalization, Resolution, and Reform. While the first three Rs have been addressed so far, the street would like to see some action on the fourth one – Reform to decisively turn positive on public sector banks.

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