Interim budget unlikely to propose capital infusion for public sector banks: Experts

Capital is infused into PSBs for two reasons – to adhere to regulatory requirements and to maintain a strong credit growth cycle in comparison to private banks.

The interim budget scheduled to be presented on February 1, ahead of the general elections, is unlikely to propose capital infusion for public sector banks (PSBs) because they are well-capitalised and have the lowest levels of bad loans, experts said.

“Problems of PSBs were solved after the asset quality review. After recognising the problems, the government funded the banks and the banks also raised capital. Additionally, they worked on improving recovery and non-performing assets, which further changed the ecosystem. Hence, capital infusion will not happen this time,” said Sanjay Agarwal, a senior director at CareEdge.

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

Also read: MC Interview | Dual control of PSBs by finance ministry & RBI is wrong: Montek Singh Ahluwalia

“Banks now have no NPA pressure as all the major bad loans they had have gone,” said Chandan Sinha, a former executive director of the RBI.
Macro stress tests for credit risk reveal that scheduled commercial banks would be able to comply with minimum capital requirements, with the system-level capital to risk-weighted assets ratio (CRAR) in September 2024 projected at 14.8 percent, 13.5 percent and 12.2 per cent, respectively, under baseline, medium and severe stress scenarios, the RBI said in the report.

PSBs 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 proposed capital infusion of Rs 2.40 lakh crore as equity in PSBs by 2018 in the FY15 budget. An additional Rs 25,000 crore in PSBs was announced in the FY17 budget. Most recently, finance minister Nirmala Sitharaman said in her FY20 budget speech that PSBs will be provided with capital infusion of Rs 70,000 crore.

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

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 Bank of Baroda and 73.15 percent in Punjab National Bank.

Also read: MC Explains: Are four PSBs merging?

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 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.

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.