Will PSBs get fresh capital from FM Sitharaman in Budget this time? Unlikely

Budget 2024: All eyes on Centre's last fiscal roadmap before parliamentary polls

Every year, one of the key announcements banking analysts look for from the national Budget is the capital allocation for India's state-run banks. These are the banking entities in which the majority stake is owned by the government. As the promoter of these banks, the government is liable to meet the capital needs of these lenders.

Will this happen this time? It is unlikely.

A majority of the bankers and industry experts expect Finance Minister Nirmala Sitharaman not to announce any fresh capital infusion for Public Sector Banks (PSB) in Union Budget 2024.

Clearly, there is a logic to that argument. There is no immediate capital requirement for India's state-run banks at this point.

Improving industry health

Over the last few years, the health of the Indian banking sector has improved significantly. This is true both in terms of bad loans and capital adequacy.

The latest numbers from the Reserve Bank of India (RBI) confirm this. The gross non-performing assets (NPA) ratio of scheduled commercial banks declined to a multi-year low of 3.2 percent and their net NPA ratio eased to 0.8 percent in September 2023, the RBI said in its Financial Stability Report for December.

Besides, the regulator feels that RBI can withstand shocks even in tougher scenarios as well. Macro stress tests for credit risk reveal that scheduled commercial banks would be able to comply with minimum capital requirements.

The system-level capital to risk-weighted assets ratio (CRAR) in September 2024 is projected at 14.8 percent under baseline stress, 13.5 percent under medium stress, and 12.2 percent, under severe stress scenarios, the central bank noted in the report. These levels are comfortably above the desired levels.

Also, one must note that the Centre has infused capital in PSBs multiple times over the last few years. To be precise, the state-run banks have undergone capital infusion three times in the last 10 budgets, amounting to a total of Rs 3.35 lakh crore. Capital infusion in PSBs serves two primary purposes: meeting regulatory requirements and sustaining robust credit growth cycles in comparison to private banks.

The government has also infused capital in PSBs outside the budget. In February 2021, Sitharaman announced a capital infusion of Rs 20,000 crore in PSBs for FY22. Later in March that year, the government announced a capital infusion of Rs 14,500 crore in four PSBs through zero-coupon bonds.

Government ownership

The Central Government and state governments own a 57.49 percent stake in the State Bank of India, the country’s largest lender, according to the latest data available. Governments (central and states) own 63.97 percent in the Bank of Baroda and 73.15 percent in the Punjab National Bank.

In Union Bank of India, Canara Bank, and Central Bank of India, the government holding is at 76.99 percent, 62.93 percent, and 93.08 percent, respectively.

In the Indian Bank, Bank of Maharashtra, and Bank of India, the government shareholding stood at 73.84 percent, 86.46 percent, and 73.38 percent respectively. And the central and state governments owned 98.25 percent in Punjab and Sind Bank, 96.38 percent stake in Indian Overseas Bank, and 95.39 percent stake in UCO Bank.

Hence, adequate capital position and improving asset quality may prompt the government not to announce fresh capital infusion in the budget. In an election year, the government presents only an interim budget or seeks a vote on account and leaves it to the next government to present the full budget.

As a result, big announcements are unlikely in the upcoming interim budget. For the banking sector too, this budget is likely to turn out to be a non-event when it comes to PSB recapitalisation.

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