The government allocated capital to only nine public sector banks, which have shown better efficiency in recent years. Two parameters were taken into consideration for the selection and the allocation of capital — weighted average of return on assets (ROA) for all PSBs for the last three years (those who are above the average were considered), and the return on equity (ROE) for the last financial year.
The government stake in some of the banks that were denied fresh capital ranges between 65% to 80%, or even more in some cases. Given the present government has agreed to bring down its stake to 52%, there is headroom for banks to dilute stake. Some of the banks have taken board’s approval for raising capital for the market.
The government is not keen to dilute its stake as valuations of most public sector banks remained subdued despite the current bull run in the equity markets.
“It is our responsibility to ensure that if we are going to dilute our stake it is done at an appropriate valuation,” Jayant Sinha, minister of state, finance had said earlier in January.
Sharp deterioration in asset quality over the past few years has dented profitability of public sector banks more than their private sector peers. The proportion of restructured advances is also much higher for government banks.
“Capital raising efforts by PSBs, other than the capital infusion by the government, face challenges because of their relatively low equity valuations compared to their private sector peers,” the central bank commented in its latest Financial Stability Report. “The ultimate improvement in valuations can only come from commensurate improvements in asset quality, governance structures and operational efficiency.”
According to Reserve Bank of India (RBI) data, stressed advances (NPA + standard restructured advances) of the banking system increased to 10.7% of the total advances from 10% 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 had said.
Banks are expected to remain under pressure on the capital front due to additional requirements towards the capital conservation buffer, the countercyclical capital buffer and supervisory capital, apart from supporting business growth.
Moreover, since the banking regulator will withdraw its forbearance of lower provisioning for debt recast from the next financial year, banks will need to set aside higher capital for restructuring advances. From April 1, banks have to make higher provisions for standard restructured advances — that is in line with non-performing asset provisioning which is 15-20% — as compared to 5% now.