State-run lenders Bank of Maharashtra, Central Bank of India and UCO Bank on Wednesday got board approvals to raise a total of Rs2,348 crore by selling shares to the government, exchange filings by these banks showed.
This comes after the government informed each of these banks on 28 December that it has allocated capital to them. According to an executive director of a state-run bank, who spoke under condition of anonymity, this allocation is under the 2015 Indradhanush plan, for which the government has made budgetary allocation of Rs20,000 crore in bank recapitalisation over this fiscal year and the next.
Banks, especially state-owned lenders, are need in of capital to not only meet regulatory requirements under the so-called Basel III norms, which will be fully implemented from April 2019, but also to clean up their stressed balance sheets. Indian banks are sitting on stressed asset pool of over Rs10 trillion.
With these three banks, the government has now allotted a total of Rs7,577 crore to six public sector banks, all of whom are under the Reserve Bank of India’s prompt corrective action (PCA). The other three banks are IDBI Bank, Dena Bank and Bank of India. Of these, IDBI Bank has got the highest allocation of Rs2,729 crore.
“This should be as per the budgetary allocation and hence, the government is just going as per the plan. Nevertheless, it will help these banks to meet the minimum regulatory capital requirement. We will have to watch out for the details of the recapitalisation bonds and what is allocation there, because here, the government is also looking at improving credit flow along with strengthening public sector banks,” said Alpesh Mehta, deputy head of research at Motilal Oswal Securities.
The central bank has put lenders under PCA owing to their weak financial health as bad loans soared and return on assets turned negative. Fall in capital levels below the regulatory prescription can also lead to initiation of PCA.
PCA forces banks to step up recoveries of bad loans, reduce risky loans, strengthen capital base and restrict branch expansion, among other measures, in order to improve balance sheet health.
The capital allocation comes at a time when the government is yet to announce the final details of the recapitalisation bonds. In October, finance minister Arun Jaitley had announced a Rs2.11 trillion bank recapitalisation plan for state-owned lenders weighed down by bad loans, seeking to stimulate the flow of credit to spur private investment.
Out of the total commitment, Rs1.35 trillion is expected to come from the sale of so-called recapitalisation bonds. The remaining Rs76,000 crore will be through budgetary allocation and fundraising from the markets.
Source: Mint