Additional fund infusion to help banks lower NPAs: report

The overall capital infusion into state-run banks during FY15-FY19 stands at Rs 2.56 trillion.

Mumbai: The government decision to infuse Rs 41,000 crore more capital capital into the state-run banks is positive for these lenders as it will help them lower their losses on dud loans, says a report. On December 20, the government had sought lawmakers' approval for infusion of an additional Rs 41,000 crore, taking the total fund infusion to Rs 1.06 trillion in FY19.

"The government decision to upsize the bank recapitalisation plan for FY19 by Rs 41,000 crore to Rs 1.06 trillion is positive for state-run banks, as many of them were not able to raise equity capital from markets as was originally envisaged under the recapitalisation plan of Rs 2.11 trillion announced in October 2018," rating agency Icra said in a note on Tuesday.

With this round, the overall capital infusion into state-run banks during FY15-FY19 stands at Rs 2.56 trillion. The current round of recapitalisation would enhance the lending capacity of these banks and help them come out of the Reserve Bank's prompt corrective action (PCA) framework.

As many as 11 of the total 21 state-run banks are under the PCA framework, which imposes lending restrictions on weak banks. After the merger of Dena and Vijaya Bank with BoB, the number of public sector banks will come down to 19.

These are Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank, Uco Bank, Bank of India, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce, Dena Bank and Bank of Maharashtra. As a part of capital allocation plan for FY19, recently some state-run lenders have been allocated a relatively higher quantum of capital.

"This capital will enable lenders to reduce their net non-performing advances below the PCA threshold of 6 percent as well as achieving regulatory capital ratios (including capital conservation buffer of 1.875 percent required as of March 2019)," the note said.

Notwithstanding a higher share of capital allocation to some state-owned banks under the PCA, the agency expects capital allocation to other banks under PCA to be limited to enable them to meet the regulatory minimum capital ratios-- 7 percent of tier 1 and 9 percent of CRAR.

Despite additional capital infusion, the agency expects most of these banks currently under the PCA to report second consecutive year of losses in FY19.