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Perform or perish: Govt’s message to public sector banks

In a clear message to the public sector banks that only performers will survive, the government in an unprecedented move, decided to allocate capital to only nine public sector banks which have shown better efficiency in recent years. As a result, some of the lenders that are reeling under pressure due to mounting bad loans which has depleted capital, are left out.

The Narendra Modi-led Bharatiya Janata Party government has allocated Rs 6990 crore capital infusion in nine public sector banks in the current financial year, as compared to Rs 11,200 crore allocated in the interim budget announced by the previous United Progressive Alliance government.

“Those who have performed better than average have been rewarded,” the finance ministry said in a statement. Two parameters were taken into considerations for the selection and the allocation of capital — weighted average of return on assets (ROA) for all PSBs for last three years, and those who are above average were considered, and the second parameter was return on equity (ROE) for the last financial year.

“The Government of India has adopted this new criteria in which the banks which are more efficient would only be rewarded with extra capital for their equity so that they can further strengthen their position,” the press release said. The lenders that has received the highest share of capital was State Bank of  India (Rs 2970 crore), Bank of Baroda (Rs 1260 crore) and Punjab National Bank (Rs 870 crore).

Some of the banks that has not received capital from the government will face challenges to raise funds due to asset quality pressure. Indian Overseas Bank, for example, which reported net loss for the two successive quarters, that is July-September and Oct-December period, has seen capital adequacy ratio dropping to 10.15% as on end December as compared to 10.99% a year ago. The net loss was to the extent of Rs 750 crore during the two quarters. Its gross NPA  ratio deteriorated 77 basis points sequentially to 8.12% while net NPA ratio was at a high of 5.52% at the end of third quarter compared to 5.17% as on September, 2014.

Terming as major shift in government’s approach while allocating capital, T M Bhasin chairman and managing director of Indian Bank and chairman of Indian Banks’ Association (IBA) said the move will encourage performance.

Indian Bank had not sought capital in last five years which generated a retained earnings the region of Rs 1,000 crore in the last three years. “This year, for the nine-months period, profits have been in the region of Rs 800 crore. The government infusion of Rs 280 crore would help us to manage asset growth comfortably in 2015-16,” Bhasin said.

As per a research by Business Standard Bank of Baroda return on equity for past three financial years is in the range of 21% to 13%, while State Bank of India hovers between 16% to 10%.

Allahabad Bank with a grant of Rs 320 crore has one of the highest return on equity and assets ranging 22% to 11% and 1.02 to 0.57%, respectively. 

Most public sector banks were could not tap the equity markets to raise capital despite favourable conditions including abundant liquidity and a buoyant stock market in the last 15 months. This was due to subdued valuations amid sharp rise in non-performing assets as well as rise in restructured assets. On the other hand, some of the private sector banks have seen their valuations doubled and were quick the tap the rising stock market for raising capital.

According to Reserve Bank of India (RBI) data, stressed advances of the banking system increased to 10.7% of the total advances from 10.0% between March and September 2014. “PSBs continued to record the highest level of stressed advances at 12.9% of their total advances in September 2014 followed by private sector banks at 4.4%,” RBI said in its latest Financial Stability Report.


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