Public sector banks (PSBs) will need fresh Tier I capital of Rs 1.2 lakh crore in the next 5 months through March 2019, or Rs 21,000 crore more than what was envisaged under the Rs 2.11 lakh crore¹ recapitalisation announced by the government in October 2017, to meet Basel III capital norms.

In the past 18 months, only Rs 1.12 lakh crore² has been infused, which, as per the original recapitalisation plan, left a requirement of Rs 99,000 crore³ by March 2019.

Most of the money is needed for the 11 PSBs put under the Prompt Corrective Action (PCA) framework of the Reserve Bank of India (RBI). But given their weak performance and low valuations, PSBs banks have little ability to tap the market, which means the government will have to provide most of the requirement.

Profitability of PSBs has been under pressure because of higher provisioning costs after the RBI tightened norms for recognition of stressed assets and their resolution. As a result, most PSBs have reported huge losses in recent times and a number of them will be in the red in this fiscal, too (though to a lesser extent), which will further weaken their capital position.

Says Krishnan Sitaraman, Senior Director, CRISIL Ratings, “Over the past three fiscals, the government has infused ~Rs 1.5 lakh crore into PSBs. However, this has only helped offset losses of ~Rs 1.3 lakh crore racked up in the period. The increase in regulatory capital ratios required as per Basel III norms by March 2019, and mounting losses mean government infusion could be nearly twice the Rs 53,000 crore scheduled for this fiscal under the recapitalisation plan.”

Tier I capital adequacy ratio is stipulated is 9.5%, including a capital conservation buffer, or CCB, of 2.5%.

But if the capital conservation buffer, or CCB, is excluded, the incremental capital required this fiscal will reduce sharply to ~Rs 40,000 crore. CCB is the capital buffer that banks have to accumulate in normal times to be used for offsetting losses during periods of stress. It was introduced after the 2008 Global Financial Crisis to improve the ability of banks to withstand adverse economic conditions.

^{^}as on March 31, 2019; risk weighted assets (RWA)

Amid weak profitability and depleting capital cushion over the regulatory minimum, meeting the CCB requirement is becoming onerous for many PSBs. Already, those under PCA have had to recall their Additional Tier 1 bonds in recent times, which has impacted their capital adequacy.

Of the 21 PSBs, 13 had Tier I capital adequacy ratios below the regulatory norm as on June 30, 2018.

Says Vydianathan Ramaswamy, Associate Director, CRISIL Ratings, “Considering the weak capital position of most PSBs, the imperatives are clear: the quantum of capital infusion has to increase, risk-weighted assets need to be brought down, and better-performing banks have to be nudged towards the market for capital. And further consolidation of stronger PSBs with the weaker ones – like the tri-merger between Bank of Baroda, Vijaya Bank and Dena Bank now in progress – can also help reduce the additional capital required.”

¹ Rs 1.53 lakh crore government infusion + Rs 58,000 crore to be raised from the market
² Rs 1 lakh crore government infusion + Rs 12,000 crore raised from the market
³ Rs 53,000 crore from the government and Rs 46,000 crore from the market