Government can’t finance capital needs of banks
Though the finance minister has set aside Rs 11,200 crore to infuse into public sector banks as capital in FY15, not only is this smaller than the Rs 14,000 crore infused in FY14, this is nowhere near enough. Indeed, if the government doesn’t take a policy decision to reduce its stake in these banks, the only option is for PSU banks to lend at a much lower rate than what the economy needs. Indeed, not only do banks require funds to grow their books, in the case of banks like Union Bank and Central Bank, capital infusion is required to shore up the books even at current levels of lending—Union Bank has a tier-1 capital of 6.7% and Central Bank 7.1%.
While RBI estimates banks need around Rs 1.4-1.5 lakh crore of common equity to be fully compliant with Basel III norms by 2018—this suggests the government needs to pump in Rs 20,000 crore a year to retain its current 51% stake—it does not indicate the amount of internal accruals that banks will be adding back to their equity each year, as the lower the internal accruals, the higher the amount the government needs to infuse. More important, RBI doesn’t tell us what happens if, with rising restructured assets, banks will be able to plough back the money have in past years—FY13 profits after tax of PSU banks were R48,665 crore. Another estimate, by Credit Suisse suggests banks need $35 billion (Rs 2.16 lakh crore) more over the next 3 years if loan growth is to be in the 18% range—if this money is not made available, PSU banks will have to restrict loan growth to around 10-12% a year.
More worrying is the larger Credit Suisse estimate that takes into account the rise in impaired assets in PSU banks and the under-provisioning. Credit Suisse argues that the currently unprovided for impaired loans are greater than 100% of book value for nearly half the sector. Raising the impaired assets coverage to 70% will require another $45 billion (Rs 2.78 lakh crore). Theoretically, the government can get LIC to invest in banks, but this can’t be a long term solution. Sooner, rather than later, the new government will have to take a call on lowering its stake in PSU banks, at least the ones that have the balance sheets to be able to attract investors—though, based on SBI’s recent experience, being able to raise money in capital markets isn’t a sure shot either.