Indian lenders reeling under the pressure of high provisioning against bad loans now face the risk of falling below the regulated capital threshold. The risk is especially high if they are unable to raise additional equity in time.
The Reserve Bank of India (RBI) raised concerns on the capital adequacy of lenders that face such a risk in its June 2019 Financial Stability Report (FSR).
Under severe macroeconomic stress, as many as nine banks may see a fall in their Capital-to-Risk weighted Assets Ratio (CRAR) below 9 percent; while five may see their Common Equity Tier (CET) 1 capital ratio below 5.5 percent by March 2020.
For the baseline scenario, RBI said that five banks may have CRAR below the minimum regulatory level of 9 percent by March 2020, without any planned recapitalisation by the government. The Central bank did not reveal the identities of these banks.
With the Modi 2.0 government set to unveil the Union Budget on July 05, bankers are hopeful that around Rs 30,000 crore will be allotted to state-run banks, although the RBI chief has suggested a different approach.
Governor Shaktikanta Das felt that there should be a special focus on performance reforms in banks. "As far as public sector banks are concerned, the proof of the pudding lies in the PSBs' ability to attract private capital through market discipline rather than being overly dependent on the government for capital," Das said in the FSR.
In December 2018, the government had increased the target for the planned recapitalisation of state-run banks to Rs 1.06 lakh crore, from Rs 65,000 crore as budgeted earlier for FY18-19. This was higher than the Rs 88,139 crore equity that banks raised from the government as well as markets in the previous financial year, as against Rs 2.11 lakh crore that was earmarked for the purpose.
"The Indian banking sector faces high non-performing assets (NPA). The capitalisation of many public sector banks is low. These, coupled with slow deposit growth and risk aversion by banks have created a funding shortage. The non-banking finance companies (NBFC) funding problem has worsened the situation," said Sujan Hajra, chief economist at Anand Rathi.
State-run banks, especially those that are still under RBI’s Prompt Corrective Action (PCA) framework, are in dire need of capital. "PSBs are bound by capital constraints and further capital infusion by the government will be consumed to meet necessary regulatory threshold; growth capital is still elusive," said Kunal Shah, analyst, Edelweiss Securities.
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