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Government Shareholding Pattern in Public Sector Banks As on 31st March, 2014 -

Out of 27 PSBs, Government of India controls 22 through majority holding. In the remaining 5 banks, state-run SBI holds majority stake.  The shareholding pattern in PS Banks as on 31st March, 2014 was as follows:-

Thus, we see that 16 banks have Govt holding in excess of 60%, and thus these banks have a better chance to raise funds from public (without the participation by GoI) and still remain PSUs.   On the other hand remaining six banks have only limited scope for raise funds from public and will need support of GoI to continue their status as PSU.

CAR of Indian Banks As on 31st March, 2014 :

Let us now see what is the CAR pattern of public sector banks as on 31st March, 2014 :-

Public-sector banks' average capital adequacy ratio fell  to 10.67 per cent as of the quarter ended June,2014  compared with 11.18 per cent in March 2014

Recent Developments On the Front of Capital Infusion in Public Sector Banks :-

GoI has been infusing capital into public sector banks to support their status as PS Banks.  The recent developments in this regard upto mid March 2015 can be summed as follows:-

(A)                        Upto FY 2013-14  : GoI had infused capital of Rs 14,000 crore during 2013-14 in 14 PSBs.   [The government has also infused capital of Rs 12000 crore in 2011-12;  Rs 12,517 crores in 2012-13];.  All these have been accounted for in the above table

(B)                        FY 2014-15 : GoI has decided to infuse Rs 6,990 crore in 9 PSBs during 2014-15, though Rs 11,200 crore was allocated for capitalization in the interim Budget presented by the previous government in 2014 (However, the budget presented by Mr Jaitley in July 2014, did not mention any specific amount for capital infusion)

                 (C)                          FY 2015-16 (Budget) :  In Budget for 2015-16. , Finance Minister Arun Jaitley had proposed infusing of only Rs 7,940 crore funds  in the public sector banks to enable them maintain adequate capital. 

The above pattern of small infusion of capital shows that there is likely to be major shift in the shareholding pattern and CAR of the public sector banks in the years to come, starting the FY 2015-16.

What is Worrisome for PS  Banks / Challenges before PS Banks  :

(a) The most worrisome factor for the banks is the increasing bad loans, which continue to mount with interest rates still staying high.   Gross non-performing assets (NPAs) of public-sector banks increased to 4.1 per cent as of the end of March 2014 from 3.6 per cent a year ago.   Their net NPA as a proportion of net advances were 2.2 per cent as at the end of March 2014, as , compared with 1.7 per during the same period a year earlier.   

In addition to alarming situation on NPA, Banks are also sitting on a pile of restructured assets, with the ratio of recast assets to gross advances standing at 5.9 per cent as of the end of March, 2014  compared with 5.8 per cent a year ago. Public-sector banks account for 92 per cent of the sector’s total restructured advances.

 In terms of RBI guidelines (till mid of March 2015) from 1st April 2015, banks have to make higher provisions for standard restructured advances in line with non-performing asset provisioning which is 15-20 per cent,  compared to five per cent now.   Thus, with the withdrawal of  forbearance of lower provisioning for debt recast from 1st April 2015, banks will need to set aside higher capital for restructuring advances.   This will adversely hit the banks.   It has to be seen whether RBI comes to rescue of the banks. 

With CAR having hit, the weak banks will find it difficult to give fresh credit, and will need additional capital.   Thus, there is a danger that some of the banks may not be even able to expand their business which in turn may additionally hit their bottom lines.

   (b) Everybody now knows that the public-sector banks will need additional capital in the coming years to comply with the Basel-III norms. According to government estimates, state-run banks would require Rs 2.4 lakh crore of equity capital by 2018 to meet Basel III  norms, which are now being  implemented in phases in India from April 1, 2013, and these will be fully implemented by March 2019.  Banks are expected to remain under pressure on the capital front due to additional requirements towards the capital conservation buffer, the counter-cyclical capital buffer and supervisory capital, apart from supporting business growth.

Thus, it is another major challenge for banks as to how to raise capital.  With merely Rs7940 crores budgeted for 2015-16, the outlook looks dimmer for the PS Banks.    

We have mentioned above that government has announced  infusion of  Rs 6990 crores in nine banks in January 2015.   It was  during the Gyan Sangam meet, which was attended by PM Narendra Modi, held on 1-2 January 2015 and attended by the chairpersons and managing directors of PSBs and financial institutions, where it was stated that  Banks which are more efficient would only be rewarded with extra capital for their equity so that they can further strengthen their position. 

To infuse capital on efficiency parameters, weighted average of return on assets (ROA) for all PSBs for last three years was put together and all PSBs, which were above the average, were considered for capital infusion.     The second parameter that was considered was return on equity (ROE) for these banks during the last financial year, and similarly those performing better than average have been rewarded. So far, the Union government was infusing capital to those banks hit by equity erosion.   The details of the capital infused in 2014-15 (announced till mid March 2015) are as follows:

This selective infusion of capital surprised the remaining 12 banks.    Banks that have not received capital, which is essential for growth and provisioning for stressed assets, are in a quandary.   Government shareholding in 12 banks that were denied fresh capital in 2014-15,  ranges between 65 per cent and 80 per cent.   Thus, these banks are wildered as to how to continue with the growth and raising of capital.

 It has also sent undercurrent signals that either you perform or perish. 

(c ) There are two more developments which needs to be kept in mind :-

(i)               The government has shown that  PS Banks should go to the market and raise capital tapping the retail investor base, keeping the minimum government holding at 52 percent.    However, tapping market as  wanted by  would not  be an easy task for most of the PS banks, which have their valuations and balance sheets under pressure.

(ii)            On 11th March, 2015, the government  has allowed seven public sector banks (PSBs) to tap markets for raising capital needed for expansion and capital adequacy, saying it has limited fiscal space to recapitalise lenders.  However, the government has not yet disclosed the names of banks which have got government approval for raising capital through market, not did it give quantum and timing of such public issues.

Thus, now the government made its stand clear when  in mid March 2015, Financial Services Secretary Hasmukh Adhia told reporters that  "The government doesn't have space to give Rs 20,000 crore or 25,000 crore (for capital infusion) ... If banks require further capital they have other means to raise capital including from raising capital from market.".

Conclusions :

 Thus at the time of writing this article (ie mid March 2015),  it is clear that GoI will not be supporting the weak banks as it was doing in the past.    They will need to raise their capital requirement funds on their own, even if it results in dilution of Government holding in such banks.  However, the Government has shown inclination to dilute Government stake only upto 52%.    Thus, soon will find some banks may be forced to tap the market inspite of not being good times for banking stocks at the stock market.   If they fail to tap the market, their CAR will go down and thus now allowing them to further expand their business, thereby bring their growth to halt.

 Thus 2015-16, will see changes in the pattern of Government holding in PS Banks and some weak banks may face the dilemma of either stopping their growth activities or merge with stronger bankers.    Thus, Government may be able to implement its agenda of bank mergers without any legislation or notifications.

 These are the testing times for banking industry as they have failed to take timely action, and encouraged corruption in promotions, in last one decade when their NPAs were increasing and their CMDs were giving  false hopes at the end of each quarter that next quarter will see improvements, whereas they continued to slip further deep into red as far as NPA level is concerned.   Now, it is time to perform or perish for weak banks.