Infusion of capital is credit positive for public sector banks

Vastavam web: The latest infusion of capital in the state-run banks by the government is credit positive but lenders also need to improve efficiency and put better risk management practices, says a report.On Wednesday, the government announced that it will infuse Rs 88,139 crore capital in 20 public sector banks before March 31 to boost lending and revive growth.”Beyond solving the immediate balance-sheet problems, PSBs require significant improvement in risk management practices, efficiency gains, and better overall governance to boost the health of the sector. Nevertheless, it is a good beginning,” the rating agency’s credit analyst Deepali Seth-Chhabria said in the report.

The finance ministry will raise Rs 80,000 crore through recapitalisation bonds and provide another Rs 8,139 crore from the budget to recapitalise the banks.
In the current round, IDBI Bank got the biggest capital injection at Rs 10,610 crore. The bank has a huge amount of bad debt and dipped into its capital conservation buffer (CCB) last year.This capital infusion is a whopping 47 per cent of the bank’s tier 1 capital as of September 30, 2017. Indian Bank did not receive any capital in this round because of its better performance. “We view the bank’s capitalisation as adequate and better than that of most of its peers,” the rating agency said.

The capital injected into large banks such as SBI and Bank of Baroda, which already have a relatively better capital position, should help them to accelerate growth.The government also announced a reform agenda with this capital infusion plan. It said the recapitalisation would be dependent on performance and reforms.