The differences between the government and the Reserve Bank of India are out in the open and one of the contentious issues has been the Prompt Corrective Action (PCA), which restricts the weak and bad debt-ridden banks. It is a tight rope walk for the government — keeping its fiscal deficit under control and also adequately capitalising the banks it owns, so that they are able to lend freely.
This is going to get tougher as a CRISIL estimate shows that public sector banks need around fresh tier-I capital of Rs 1.2 lakh crore infusion in five months to meet the Basel III norms. This is Rs 21,000 crore more than what was estimated earlier, when the government announced Rs 2.11 lakh crore recapitalisation in October 2017 to meet the Basel III norms.
While larger banks like State Bank of India are charting out their plans for recapitalisation through tier-II bonds and are waiting for an equity issue at an appropriate time, the weaker banks under PCA need the government to provide them most of the required capital. There are 11 PSU banks under PCA that need fresh capital and their ability to lend more depends upon the capital infusion.
“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,” says Krishnan Sitaraman, senior director, CRISIL Ratings.
Tier-I capital adequacy ratio stipulated is 9.5 per cent, including a capital conservation buffer (CCB) of 2.5 per cent. If the CCB is excluded, the incremental capital required would reduce sharply by Rs 40,000 crore, CRISIL said.
However, the RBI has been in no mood to relax norms. Even last week, deputy governor N S Vishwanathan spoke at length on the need for higher capital requirement. “… suggestion by some that our capital requirements are more onerous than international standards is not correct at all. As the need for repeated recapitalisation has proved, banks in India need to aspire to have higher capital levels,” Vishwanathan said.