Oxygen for Public Sector Banks in India: Enough?

Written by Nikita Gupta || 02 Aug 2016

Last week, the government injected Rs 22,915 Crores or approximately $ 3.14 billion in 13 public sector banks in India. Of this one third of the allocation went to the State Bank of India. The capital infusion is expected to help banking institutions clean up their books, increase lending activity and also raise additional funds. However, not everyone is celebrating the move.

According to rating agencies, government’s capital infusion falls way short of the requirements of the state owned banks. It is estimated that in order to meet Basel III requirements by 2019, most public sector banks will need $90 billion additional capital at an aggregate. The $3.14 billion is insignificant in that context. Experts estimate that public sector banks in the country require Rs. 40,000 to 50,000 Crore of immediate Tier I Capital for growth.

The Government, on its part, is also stretching to stabilize the sector. It has committed a total capital outlay of Rs. 70,000 Crore till end fiscal year 2019. However, this may not be adequate. At the moment the banks, especially the public sector banks in the country are bleeding on account of the regulatory push to clean up balance sheets appropriately for NPAs. The top 11 PSBs reported cumulative losses to the tune of Rs. 20,200 Crore in the fiscal ended March 2016. Interestingly the same set had reported a cumulative profit of Rs. 29,100 in the previous fiscal year.

Important to note here that a large chunk (75%) of this years planned outlay for capital infusion does not come with any strings attached. The Government has claimed that there are 8,167 wilful defaulters owing banks a cumulative amount of Rs. 76, 685 Crores, the institution of a recoveryl mechanism around these NPAs is still a work in progress. Thus, the importance of the capital infusion in the ailing sector and the focus on its adequacy.

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