The government is likely to provide capital infusion of around Rs.8,000 crore to about six PSBs that have fallen short of capital requirements. The Punjab National Bank (PNB) may be included in this capital infusion initiative.
A senior official from the finance ministry said that there are several banks that have issued tier 1 capital bonds, with pending interest payments. If the regulatory capital norms are not met, then these banks will not be allowed to fulfill the payments. The official also mentioned that when public sector banks default on these kind of payments, their ratings will be adversely affected. So the government cannot allow these banks to default on payments.
Banks raise capital through the mode of AT1 bonds. These are perpetual in nature and offer higher interest rates to individuals who have invested in them. Bad loans and losses have made the servicing of these bonds difficult; hence the risk of default is high.
The planned capital infusion will be beneficial to banks that are under the Central Bank’s Prompt Corrective Action (PCA) strategy. The PCA strategy is expected to help banks avoid riskier activities and improve their balance sheets by conserving capital.
In the initial part of the year, the government had requested banks under the Prompt Corrective Action framework to recall AT1 bonds. Some of the banks that were involved in this include the Bank of Maharashtra and Oriental Bank of Commerce.
In spite of recapitalisation, the tier 1 capital position that was reported by 5 of the 15 PSBs is close to 7%, the minimum regulatory requirement. This was indicated in a recent ICRA report.
In January this year, the central government announced that there would be a reforms package to make 20 state-run banks more accountable in FY18, in addition to the provision of capital support worth Rs.88,000 crore. Rs.8,139 crore out of this was through budgetary support and Rs.8,000 crore was through recapitalisation bonds. The banks were also expected to raise Rs.10,312 crore.
The recent capital infusion was announced in the month of October last year. The government is expected to provide Rs.1.35 crore through recapitalisation bonds. The banks that benefit from this offer will have to raise Rs.58,000 crore as well.