Is the recapitalization of PSB a thing of the past?

While the Union’s 2023-24 budget has been described as capital-intensive, the lack of an allocation for the recapitalization of public sector banks (PSBs) is conspicuous.

Bank recapitalization refers to the injection of capital into banks to enable them to meet mandatory capital adequacy standards set by the Reserve Bank of India from time to time.

Bank recapitalization has been an integral part of the Union budget since 2016-17. Higher non-performing assets (NPAs), provisions and write-downs justified capital support for banks. Between FY17 and FY21 the Center invested approximately ₹3.31 lakh crore in banks.

However, things have changed now. With the launch of the public sector bank recapitalization package and the improving profitability trend, all PSBs have a cushion of more than 100 basis points above the regulatory Tier I capital requirement as of December 31, 2022.

Even from an overall capital adequacy perspective, the average capital adequacy ratio for public sector entities is around 15 percent, which is among the highest we’ve seen in the past decade. Apparently, the Treasury did a lot of homework on this before making a decision on recapitalizing PSBs that performed well on macro stress tests.

According to the results of the stress tests, which are also carried out by RBI, SCBs are well capitalized and able to absorb macroeconomic shocks, even in the absence of further capital inflows from stakeholders. In the baseline scenario, the aggregate CRAR of 46 major banks is expected to decrease from 15.8 percent in September 2022 to 14.9 percent in September 2023. It could fall to 14.0 percent in the medium stress scenario and to 13.1 percent under the severe stress scenario by September 2023, but remains well above the minimum capital requirement, including the capital conservation buffer (CCB) requirements (11.5 percent).

“None of the 46 SCBs would breach the 9 percent regulatory minimum capital requirement over the next year, even in a severely stressed situation,” RBI recently noted. According to Bibekananda Panda, an economist at SBI, recapitalization of PSBs was not chosen as all banks have levels of capital well above regulatory requirements.

“Robust loan growth is to be supported by withdrawing SLR investment that exceeds the base requirement,” he said.

Based on RBI data updated on January 27, 2023, the system shows an excess SLR of 9.45 percent, equivalent to £17.9 trillion. In addition, banks are already competing to raise deposits via higher interest rates. Deposit growth is also keeping pace and is expected to remain resilient as banks passed on the latest 25 basis point rate hike in their monetary policy review last week. Additional deposits in the last 10 months of the current fiscal year are ₹12.53 trillion compared to ₹9.2 trillion in fiscal 22.

“The focus has shifted to raising long-term capital through green infrastructure bonds,” Paanda added. While SBI and EXIM Bank have already raised green bond capital, several other banks have similar plans.

Against this background, the banks are confident that they can finance their capital requirements themselves. For example, the Bank of Baroda could end the year with a capital adequacy ratio of over 16 percent and higher than at the start of the year, according to its Managing Director and CEO Sanjiv Chadha.

“That means you are completely self-financed in terms of capital. Now think about next year, whether credit growth is likely to moderate a bit. Therefore, you don’t even need to access the markets right now, forget whether you want to go to government again or not,” he added.

“The banks’ return ratios are improving again. I think their ability to fund themselves through the market is much better,” he added.

According to Somasekhar Vemuri, Senior Director & Head, Ratings Criteria, Regulatory Affairs and Operations, CRISIL Ratings, banks are well-positioned to grow about 15 percent this fiscal year and next, with limited need for additional capital to cope maintain the regulatory level.

“However, if growth turns out to be higher than expected in the medium term, capital requirements could increase accordingly, although they are expected to remain well below those of the past,” Vemuri said.

So can it be said that recapitalization is a thing of the past? Not necessarily. Bank performance and health are always linked to the macroeconomic environment and the likely need for recapitalization in the future cannot be ruled out.

But for now, in the medium term, it seems that the banks have gone beyond the need for capitalization thanks to a variety of measures to control the NPAs and the general recovery of the economy.