PSU Banks recapitalization plan linked with reforms is a positive step

This capital infusion is a step in the positive direction, as it will fund their growth plans and would cushion these banks to provide for NPA provision.

Jan 24, 2018 11:01 IST India Infoline News Service

The government will infuse more that Rs88,000cr into public sector banks in FY18 itself, as a part of its Rs2.11lakh crore recapitalization plan to boost the capital of state owned banks.

The capital infusion plan for 2017-18 includes Rs80,000cr through Recap Bonds and Rs8,139cr as budgetary support. This plan addresses regulatory capital requirement of all PSBs and provides a significant amount towards growth capital for increasing lending to the economy.

This capital infusion is a step in the positive direction, as it will fund their growth plans and would cushion these banks to provide for NPA provision. Besides, this will increase lending to MSMEs and make it easier for MSMEs and retail customers to transact. However, the NPA provisions of the PSU banks are expected to remain higher for next 1-2 quarter, which in turn would dent their profitability.

The reform agenda is aimed at EASE – (Enhanced Access and Service Excellence), focusing on six themes of customer responsiveness, responsible banking, credit off take, PSBs as Udyami Mitra, deepening financial inclusion & digitalization and developing personnel for brand PSB.

The banks whose regulatory requirement haven’t fallen below RBI minimum limits will get Rs35,828cr and the banks under prompt corrective action will get Rs52,311cr. The additional capital infusion by the Government is contingent on the performance of PSBs on the reform.

The breakup of capital infusion into non PCA banks for FY18 is as follows - SBI-Rs8,800cr, PNB-Rs5,470cr, BOB-Rs5,375cr, Canara Bank-Rs4,865cr, Union Bank-Rs4,524cr, Syndicate Bank-Rs2,839cr, Andhra Bank-Rs1,890cr, Vijaya Bank-Rs1,277cr, Punjab & Sind Bank-Rs785cr.

The breakup of capital infusion into PCA banks for FY18 is as follows - IDBI bank-Rs10,610cr, Bank of India-Rs9,232cr, UCO Bank-Rs6,507cr, Central bank of India-Rs5,158cr, Indian Overseas Bank-Rs4,694cr, Oriental Bank of Commerce-Rs3,571cr, Dena Bank-Rs3,045cr, Bank of Maharashtra-Rs3,173cr, United Bank of India-Rs2,634cr, Corporation Bank-Rs2,187 cr and Allahabad Bank-Rs1,500cr.

Indian Bank has not been allotted any funds, due to its better capital adequacy and performance.

The approach to the recapitalization of PSU banks has been aligned with reforms. This is with the intent to create an institutional mechanism so that the NPA problem does not occur in future. Also, the government wants to ensure maximum governance of PSU banks.

The few reforms are discussed below:
• There will be separate stress asset management mechanism for all the PSU banks for timely recovery.
• All the loans above Rs250cr will undergo special monitoring.
• Breach of any loan covenant will be shared W/entire lending consortium as a red flag.
• PSU banks will need to identify their non-core assets to monetize it.
• Each bank to adopt a policy in accordance with their core strength.
• The state run banks will have to maintain regulatory capital and would not be allowed to fail it.
• Board of the respective banks will have to assign one independent director to review progress. In addition, one survey will be conducted by the regulatory agency in respect of EASE to review the performance of these banks.

Large state-owned banks, namely, SBI, BOB, and PNB, are likely to be the key beneficiaries of the government action. We believe reported profitability of state-owned banks would remain depressed due to the accelerated provisioning requirement through FY19E.

Our top picks in PSU banks space are SBI, BOB, PNB, Canara Bank and Indian Bank.

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