The Rs 2.11 lakh crore recapitalisation package for public sector banks (PSB) announced by the government on Tuesday is a credit positive and marks a major step in revitalising these institutions saddled with non-performing assets (NPAs).
PSBs need Rs 1.4 to 1.7 lakh crore additional capital to meet Basel III requirements by March 31, 2019, so the package is adequate.
The government’s action sends a strong signal of support to PSBs and reinforces CRISIL’s belief that such backing will continue – an aspect that is factored into its ratings.
Says Krishnan Sitaraman, Senior Director, CRISIL Ratings: “The package will help PSBs to accelerate provisioning for stressed assets, speed up the NPA resolution process, and support the clean-up of balance sheets. This will, in turn, help them focus on reviving credit growth.”
As and when details of the capital infusion for individual PSBs are announced, CRISIL will factor those in and take appropriate rating action.
In the past couple of years, the capital cushion that PSBs had vis-à-vis the regulatory requirement had narrowed. And there is a possibility of a significant erosion in their net profits this fiscal because of the provision on ageing of NPAs, and sharply higher provisioning because of the resolution processes ongoing under the Insolvency and Bankruptcy Code. Like last fiscal, many PSBs are expected to report losses in the current fiscal, too.
Around half of CRISIL’s estimate of additional capital requirement for PSBs is because of the step-up in provisioning towards corporate NPA accounts – in line with potential haircuts on resolution. PSBs needed ~Rs 1.4- 1.7 lakh crore in the event of accelerated provisioning as part of the NPA resolution process.
“This is a better form of fiscal stimulus with potentially far greater multiplier effect,” said Prasad Koparkar, Senior Director, CRISIL Research. “It is also probably just in time in terms of the expectation of capex cycle revival in fiscal 2019, which will certainly need the support of a revival in bank credit.”
Meanwhile, private sector banks are adequately capitalised in view of steady return on assets and increased focus on the retail and SME segments for which the risk weightages are lower.
Additionally, private sector banks have enough flexibility to raise equity from the market due to positive investor sentiments.
The government had, including under the ‘Indradhanush’ programme, infused ~Rs 50,000 crore, into PSBs in the past couple of years.
Says Dharmakirti Joshi, Chief Economist, CRISIL Ltd: “For today’s measures to be effective, they have to be complemented by speedier banking reforms leading to a meaningful change in the operating model of PSBs.”